**%  .0 


Ft 

Fr 


Kulesand  i)e/imtiohs 


FO  R 


B<X>KKEEP 


G 


■    ••  .•  ifi 


«   «  ••  •     • 

«    •  •  •  •     • 

•        c  •  •  • 


:  C         «.  ••  •     • 


X 


^  (4° 


\o 


Principles 
Rules  and  Definitions 

FOR  BOOKKEEPING 


BY 

LLOYD  E.  GOODYEAR 

Author  of  Progressive  Business  Accounting,  Bank  Accounting,  Farm  Accounting 

and  Certain  Sets  in  the  American  Bookkeeping  Series.    Joint  Author  of 

Commission,  Real  Estate  and  Insurance,  Railroading,  Corporation, 

Manufacturing  and  Wholesaling  Sets  of  Goodyear's 

Higher  Accounting,  New  Inductive 

Bookkeeping,  Etc. 


SIXTH  EDITION 


American  Bookkeeping  Series 

Good  year-Marshall  Publishing  Co. 
Cedar  Eapids,  Iowa 


Copyright,  1913 
Copyright.  1915 
Copyright,  191G 
Copyright,  1918 
GOODYEAR-MARSHALL  PUBLISHING  CO. 
Cedar  Rapids.  Iowa 


PREFACE 

This  little  book  was  prepared  to  place  at  the  disposal 
of  students  of  bookkeeping,  and  business  people  gen- 
erally, the  principles  and  rules  needed  to  make  intel- 
ligible the  bookkeeping  work. 

A  set  of  books  in  any  business  should  be  planned  for 
a  purpose.  Knowledge  of  the  end  sought  is  essential  to  a 
single-minded  effort  to  attain  that  end.  The  business 
man  views  a  set  of  books  as  so  much  machinery  for  the 
collection  and  classifying  of  the  vital  facts  of  his  busi- 
ness, for  his  guidance.  The  accountant  plans  the  books  so 
as  to  meet  the  business  man's  requirements.  It  is  hoped 
that  reference  to  the  following  pages,  during  the  stu- 
dent's progress  through  the  bookkeeping  work,  may 
enable  him  to  take  the  attitude  of  the  accountant,  look- 
ing beyond  the  necessary  details  of  entering,  posting,  and 
filing,  to  the  general  plan  and  purpose. 

From  the  accounting  standpoint,  all  sets  of  books 
have  a  likeness  in  certain  particulars.  In  other  particu- 
lars there  is  dissimilarity.  We  shall  begin  by  referring 
to  the  matters  which  all  ordinary  bookkeeping  systems 
have  in  common. 

The  first  record  which  is  similar  in  every  business  is 
the  statement  of  assets  and  liabilities  showing  the  items 
comprising  the  net  worth.  Such  a  statement  is  necessary 
before  opening  a  set  of  books,  in  order  that  the  standing 
or  financial  strength  may  be  made  a  matter  of  record. 

After  the  business  operations  are  under  way,  at  regu- 
lar intervals  of  time  similar  statements  are  made  showing 
the  changed  values  of  the  items  of  assets  and  liabilities, 
and  the  resultant  changes  in  the  net  worth.  These  finan- 
cial statements  thus  afford  a  picture  of  the  history  and 
progress  of  the  business  through  a  period  of  years,  with  a 
definite  analysis  of  the  condition  of  the  business  at  the 
close  of  any  given  accounting  period. 

After  the  first  statement  is  made,  the  items  compos- 
ing the  statement  are  transferred  to  the  ledger,  each  item 

5#! '?  1 6 


iv  PREFACE 

under  its  proper  heading,  or  account  title,  and  each  ac- 
count showing  the  amount.  During  the  accounting 
period,  or  interval  between  statements,  the  additions  to 
or  deductions  from  the  several  accounts  of  assets  and 
liabilities  are  entered  in  the  ledger,  so  that  the  accounts 
show,  at  the  end  of  the  period,  the  amounts  to  be  trans- 
ferred to  the  next  statement. 

The  accounts  that  make  up  the  net  worth  of  the  busi- 
ness are  called  Real  accounts.  The  rules  observed  for 
keeping  them  properly  are  the  same  in  any  business,  and 
may  be  learned  once  for  all. 

In  addition  to  the  statement  of  financial  condition 
referred  to  ,a  statement  of  profit  and  loss  is  made  at  the 
end  of  the  accounting  period.  The  latter  statement  does 
not  show  any  existing  property  or  debts,  but  merely  class- 
ifies the  incomes  and  loss  expenditures.  The  difference 
between  the  total  incomes  and  loss  expenditures  is  either 
the  net  profit  or  the  net  loss  of  an  accounting  period.  The 
net  profit  or  loss  agrees  in  amount  with  the  increase  or 
decrease  in  net  worth  shown  by  the  statement  of  assets 
and  liabilities  made  at  beginning  and  end  of  the  account- 
ing period. 

The  varieties  of  incomes  and  loss  expenditures  shown 
in  the  profit  and  loss  statement  are  given  ledger  accounts 
where  the  amounts  are  entered  as  received  or  expended, 
under  the  proper  headings,  until,  at  the  end  of  the  ac- 
counting period,  the  totals  are  transferred  to  the  profit 
and  loss  statement.  The  accounts  making  up  this  state- 
ment are  called  Nominal  accounts  and  represent  no  value 
except  as  summaries  of  results. 

Every  set  of  double  entry  books  should  be  so  con- 
structed as  to  exhibit  the  elements  making  up  the  net 
worth  in  the  real  accounts  and  the  elements  making  up 
the  net  profit  or  loss  in  the  nominal  accounts.  The  fore- 
going are  essentials  in  opening  and  operating  any  double 
entry  set  of  books,  and  if  clearly  in  mind,  comprise  a  suf- 
ficient basis  for  debit  and  credit. 


PREFACE  v 

.  The  principles  governing  the  financial  statements 
and  the  ledger  accounts  are  discussed  in  Part  One  of  the 
text. 

After  the  ledger  plan,  which  follows  much  the 
same  order  in  any  business,  is  clearly  in  mind,  the  princi- 
pal, and  by  far  the  most  extensive  study  in  bookkeeping 
is  the  methods  used  to  record  transactions  and  operations 
preparatory  to  transferring  their  amounts  to  the  ac- 
counts. Different  businesses  require  books  in  great 
variety  of  form  to  accommodate  suitable  and  economical 
original  entries.  You  may  have  the  ledgers  planned  on 
the  same  outline  for  a  grocery  store,  a  printing  establish- 
ment, a  hotel,  a  coal  yard,  and  a  farm,  but  the  details 
of  these  separate  businesses  are  so  diverse  that  the  books 
of  original  entry  will  be  very  dissimilar  in  form.  This  is 
not  because  the  statements  of  results  differ  in  form,  but 
because  each  kind  of  business  requires  first  records 
peculiar  to  itself.  Each  type  of  business  must  be  studied 
individually  to  determine  the  number  and  form  of  books 
of  original  entry  suitable  for  its  records.  General  sug- 
gestions about  books  of  original  entry  are  given  in  Part 
Two  of  the  text. 

A  successful  bookkeeper  should  be  able  to  read  the 
ledger  after  he  has  posted  it,  and  to  keep  in  touch  with 
the  tendencies  of  the  business  as  reflected  in  the, accounts. 
Suggestions  about  examining  books  are  given  in  the  final 
chapter  on  Auditing. 

The  author  of  this  volume  has  uesd  due  diligence  in 
gathering  here  accounting  principles  and  bookkeeping 
rules  in  convenient  form  for  prompt  reference.  The 
Index-Commentary,  to  be  found  on  the  last  pages,  will 
serve  as  a  reference  to  all  topics  discussed.  Our  purpose 
is  to  present  these  matters  briefly,  yet  with  enough  com- 
pleteness for  practical  purposes. 


CONTENTS 

PART  ONE— PRINCIPLES 

Chapter  Subject                                                        Page 

I.     Introduction    1 

II.     Statement  of  Assets  and  Liabilities 10 

III.     Plan  of  Ledger 18 

IV.     Asset  Accounts   24 

V.     Liability  Accounts    47 

VI.     Proprietorship  Accounts    53 

VII.     Statement  of  Profit  and  Loss 59 

VIII.     Nominal  Accounts    70 

PART  TWO— RULES 

IX.  Single  and  Double  Entry 83 

X.  Business  Papers 85 

XL  The  Journal— Original  Entries 98 

XII.  The  Journal— Debit  and  Credit 104 

XIII.  The  Journal— Forms  of 119 

XIV.  The  Cash  Book   124 

XV.  The  Sales  Book  132 

XVI.     The  Purchases  Book   136 

XVII.     The  Inventories  Book   140 

XVIII.     Special  Books 142 

XIX.     Auxiliary  Books    144 

XX.     The  Ledger   145 

XXL     Auditing    155 

PART  THREE— DEFINITIONS 
Index-Commentarv   189 


VI 


PART  ONE -PRINCIPLES 
CHAPTER  I 

INTRODUCTION 

1.  Bookkeeping  is  defined  as  the  art  of  recording 
business  transactions.  A  definition  is  a  summary,  more 
or  less  complete,  of  many  details  required  to  describe  the 
thing  defined.  It  is  the  purpose  of  this  chapter  to  en- 
large in  a  general  way  on  some  of  the  functions  of  book- 
keeping as  an  aid  to  business. 

2.  Bookkeeping  in  Business.  Business  is  the  word 
generally  used  to  indicate  any  kind  of  useful  occupation 
or  employment.  It  refers  especially  to  activities  engaged 
in  for  the  purpose  of  earning  a  livelihood. 

The  necessities  and  refinements  essential  to  the  wel- 
fare of  any  person  are  produced  by  many  persons  in  all 
parts  of  the  world,  and  offered  in  exchange  for  money. 
One's  ability  to  secure  the  useful  things  included  under 
the  general  term  "a  living"  depends  on  the  amount  of 
money  he  has  to  pay  for  them ;  so  that  business,  from  the 
standpoint  of  the  person  engaged  in  it,  may  be  consid- 
ered an  effort  to  acquire  money.  This  statement  should 
not  be  construed  in  an  unfavorable  sense.  Business  that 
does  not  serve  a  useful  purpose,  or  that  does  not  produce 
full  value  for  the  money  received,  is  objectionable  even 
though  gainful  financially. 

The  efforts  of  men  to  improve  their  condition  by  in- 
creasing their  earnings  are  applied  to  different  kinds  of 
business  enterprises;  among  them,  extraction  of  raw 
materials,  transportation,  manufacturing,  trading,  and 
banking  are  leading  businesses.  All  of  these  enterprises 
are  subject  to  financial  laws.  They  require  an  invest- 
ment of  money  or  its  equivalent  to  start  them  going,  and 
they  are  maintained  by  the  earnings  derived  from  their 
operations. 


2  PRINCIPLES 

The  same  laws  govern  the  beginning  and  continu- 
ance of  societies,  clubs,  institutes,  colleges  and  other  pub- 
lic institutions.  They  also  are  maintained  by  their 
money  income. 

It  is  the  money,  or  financial,  side  of  business  that  is 
considered  in  bookkeeping.  The  object  sought  in  book- 
keeping is  a  record  of  all 'things  and  activities  of  business 
that  can  be  valued  in  money.  Other  considerations  are 
beyond  the  province  of  bookkeeping.  Every  transaction 
and  operation  of  business  is  measured  at  the  book- 
keeper's desk,  and  assigned  its  proper  place  as  an  ele- 
ment of  financial  progress.  By  this  means  those  respon- 
sible for  business  success  are  informed  step  by  step  re- 
garding the  tendencies  of  their  activities. 

This  knowledge  is  valuable  to  the  individual  who 
would  leave  the  ranks  of  the  great  majority  of  men  who 
are  unable,  through  ignorance  of  their  financial  position, 
to  achieve  financial  independence.  That  a  firm  or  com- 
pany should  attempt  a  grasp  of  its  complex  business  re- 
lations without  bookkeeping  is  practically  out  of  the 
question.  And  it  is^not  too  much  to  expect  that  the 
knowledge  and  use  of  bookkeeping  by  the  average  citizen 
will  do  much  to  strengthen  an  intelligent  attitude  toward 
questions  surrounding  the  relative  rewards  of  capital  and 
labor,  that  will  have  a  favorable  effect  on  the  present 
inequitable  distribution  of  wealth. 

3.  How  Money  Is  Earned.  The  simplest  way  to  se- 
cure income  is  to  work  for  wages  or  salary.  This  re- 
quires no  investment  risks,  and  the  amount  one  Receives 
is  settled  by  an  agreement  to  sell  one's  services  for  a 
price.  Increased  income  is  secured  by  improving  the 
quality  of  services.  However,  if  one  uses  his  entire  in- 
come in  living  expenses,  he  will  act  without  proper  fore- 
sight, for  any  condition  throwing  him  out  of  employment 
would  diminish  his  ability  to  live.  So  it  is  generally  con- 
ceded that  a  part  of  one's  earnings  should  be  saved  to 
make  up  for  diminished  earnings  later  on. 

Money  or  property  saved  constitutes  capital;  that 
is,  savings  may  be  used  in  such  a  way  as  to  produce  addi- 


INTRODUCTION  3 

tional  income.  If  the  savings  are  placed  in  a  savings 
bank,  the  depositor  will  receive  income  at  the  rate  of  two 
to  four  per  cent  interest  annually  in  addition  to  his  wages 
or  salary.  He  can  invest  his  savings  in  bonds  or  stocks, 
receiving  an  income  of  interest  or  dividends.  If  he  in- 
vests his  savings  in  land  or  buildings,  he  may  receive  an 
income  from  rent  or  from  the  increase  in  the  value  of  the 
property.  He  may  invest  his  savings  in  trade  and  give 
to  the  business  his  time,  and  receive  income  from  the 
profits  which  his  labor  and  capital  jointly  earn.  Nearly 
everyone  possesses  money  or  property  that  will  produce 
income  if  wisely  used.  But  some  uses  of  capital  will  re- 
sult in  losses ;  hence  it  is  desirable  to  keep  informed  as  to 
the  relative  income  from  different  kinds  of  investments. 
One  way  to  do  this  is  simply  to  memorize  all  the  facts, 
and  some  business  men  do  this  with  a  considerable  de- 
gree of  success.  Yet,  it  is  unquestionably  more  eco- 
nomical of  time  and  mental  energy  for  a  person  to  keep 
a  record  of  his  business  matters  in  well  arranged  books, 
even  though  his  financial  interests  are  small.  He  is 
then  sure  of  the  facts  without  waste  of  time  or  thought. 
The  successful  business  man  does  not  permit  his  thought, 
time,  or  capital  to  be  tied  up  in  any  unnecessary  way,  but 
uses  all  these  resources  as  far  as  practicable  in  produc- 
tion. 

4.  Bookkeeping  a  Financial  Record.  When  speak- 
ing of  bookkeeping  as  the  "art  of  recording  business 
transactions,''  it  is  important  to  remember  that  the  pur- 
pose of  the  record  is  to  afford  financial  information.  The 
term  "finance"  implies  the  handling  of  money  and  is 
closely  associated  with  the  idea  of  receipt  and  expendi- 
ture of  cash.  Bookkeeping  fulfills  its  purpose  only  when 
it  states  clearly  the  financial  weight,  or  the  money  value 
of  business  transactions  as  they  affect  some  one  person 
or  firm,  or  other  association  in  whose  interest  the  books 
are  kept.  The  financial  weight  is  expressed  in  state- 
ments, accounts,  and  reports  which  summarize  several 
items  of  like  financial  effect  in  one  combined  financial 
effect. 


4  PRINCIPLES 

There  are  two  principal  manual  phases  of  bookkeep- 
ing: (1)  the  preservation  of  a  true  business  history  of 
some  certain  concern;  (2)  the  classification  of  the  items 
recorded  in  such  a  way  as  to  show  the  receipts  and  dis- 
bursements of  cash,  and  the  cost  and  yield  of  the  other 
component  parts  of  the  given  concern. 

A  bookkeeper,  as  such,  should  know:  (1)  how  to 
record  all  transactions  that  occur  in  a  given  business; 
(2)  how  to  post  all  entries  to  the  proper  accounts;  (3) 
how  to  show  the  condition  of  any  account,  by  means  of 
a  statement;  (4)  how  to  verify  his  work  by  a  trial  bal- 
ance; (5)  how  to*  preserve  vouchers  relating  to  his 
records. 

5.  Accounting  is  the  governing  element  in  book- 
keeping. It  is  employed  in  determining  the  forms,  ar- 
rangement and  terms  used  in  financial  statements,  ac- 
counts, and  reports;  and  interprets  their  meaning.  The 
accounting  profession,  as  a  result  of  long  study  and  ob- 
servation of  business  conditions,  has  defined  the  funda- 
mental elements  of  financial  importance  found  in  busi- 
ness concerns  generally,  and  in  so  doing  has  developed 
a  standard  system  of  accounts. 

The  science  of  accounting  is  essentially  very  simple 
and  easily  understood.  But  it  is  a  branch  of  learning 
that  has  been  greatly  neglected,  although  the  time  spent 
in  its  practical  mastery  would  tend  to  greater  average 
prosperity  among  people  in  business.  Accounting  is  the 
one  science  that  measures  the  utility  of  all  other  sciences. 

There  has  been  a  strong  tendency  to  disassociate  ac- 
counting and  bookkeeping  as  though  they  have  two  dif- 
ferent functions.  But  it  is  impossible  to  tell  where 
bookkeeping  ends  and  accounting  begins.  In  large  es- 
tablishments, the  " bookkeepers' '  enter  transactions,  post 
and  do  other  mechanical  work;  the  "accountants"  devise 
the  bookkeeping  plan,  prepare  the  general  statements, 
and  audit  (examine)  the  books.  But  the  work  of  both 
may  be  classed  under  the  general  designation,  bookkeep- 
ing.    The    person   who    keeps   his   own    books   must    be 


INTRODUCTION  5 

familiar  with  the  principles  of  accounting  in  order  to 
keep  books  effectively. 

6.  Transactions.  A  business  transaction  is  some 
single  business  performance,  as,  a  sale,  a  purchase,  the 
collection  of  a  sum  due  from  another,  the  payment  of  a 
debt  due  to  another,  the  discounting  of  a  note,  etc. 

But  dealings  with  others,  such  as  the  above,  are  not 
the  only  business  occurrences  that  affect  the  business 
financially.  The  property  of  a  business  may  be  of  such 
a  nature  that  it  will  depreciate  in  value  more  or  less  rap- 
idly, and  thus  diminish  the  entire  value.  Fire  losses, 
theft  or  other  things  of  an  unexpected  nature  may  hap- 
pen to  the  advantage  or  disadvantage  of  the  concern.  A 
record  of  all  such  matters  should  be  kept  and  the  effect 
of  them  recorded.  The  term  "transactions"  as  found 
in  the  definition  of  bookkeeping,  must  be  used  in  a  broad 
sense,  covering  every  operation,  occurrence  or  circum- 
stance that  has  any  bearing  on  the  capital  or  income  of 
the  business  undertaking. 

7.  How  Transactions  Are  Recorded.  The  trans- 
actions of  a  business  concern  are  recorded,  as  a  rule,  in 
two  ways: 

(a)  The  first  record,  or  original  entry,  recites  in 
the  briefest  manner  possible,  all  of  the  essential  facts 
about  the  transaction.  This  explanatory  matter  should 
be  abbreviated  as  much  as  possible,  but  should  contain 
all  the  details  necessary  to  inform  one  unacquainted  with 
the  circumstances  as  to  what  actually  occurred.  One 
desirable  feature  in  a  business  record  may  be  noted  here : 
The  record  should  be  written  as  something  done  by  the 
person  for  whom  the  books  are  kept.  In  the  following 
examples  the  words  enclosed  are  understood,  but  do  not 
appear.  (I,  the  proprietor,)  "Sold  John  Smith,  for  cash, 
5  lb.  sugar  @  .08  =  $.40;"  not,  "John  Smith  bought  of 
me,"  etc.  (I,  the  proprietor,)  "Received  from  W.  Mills," 
ect. ;  not  "W.  Mills  paid  me,"  etc.  Every  transaction  is 
an  act  of  the  proprietor,  so  far  as  the  books  are  con- 
cerned, and  is  recorded  so  as  to  show  results  to  the  pro- 


6  PRINCIPLES 

prietor,  regardless  of  the  acts  of  dr  results  to  others.  The 
first  record  is  made  so  as  to  satisfy  any  future  inquiry 
as  to  what  the  proprietor  actually  did,  and  should  be 
complete  to  that  extent. 

(b)  The  second  record  is  made  to  show  the  financial 
effects  of  the  transactions  on  the  concern  as  a  source  of 
income  to  the  proprietor.  The  concern  as  a  whole  is 
made  up  of  elements  all  of  which  are  classified  as  to  their 
financial  weight  in  summing  up  the  capital  and  income. 
Each  element  is  given  a  name  which  is  used  as  the  head- 
ing of  an  account, 

An  account  consists  of  an  entry  or  group  of  entries 
made  to  show  the  financial  weight  of  transactions  having 
bearing  on  the  element  named  or  indicated  by  the  ac- 
count heading.  This  weight  is  shown  by  either  debit 
entries  made  in  the  left  of  two  money  columns,  or  credit 
entries  made  in  the  right. 

A  debit  entry  shows  a  value  passed  into  the  element 
named  or  indicated  by  the  heading. 

A  credit  entry  shows  a  value  passed  out  of  the  ele- 
ment named  or  indicated  by  the  heading. 

When  the  proprietor  performs  a  business  transac- 
tion, he  causes  a  value  to  pass  into  one  or  more  elements 
out  of  one  or  more  other  elements  of  the  concern;  hence 
every  transaction  requires  debit  entry  in  one  or  more  ac- 
counts and  credit  entry  in  another  or  others,  the  debits 
and  credits  being  in  equal  amounts. 

The  net  amount  of  any  account,  found  by  subtract- 
ing the  lesser  from  the  greater  side,  is  called  the  balance. 
The  balance  of  the  account  shows  the  weight  of  the 
named  element  in  increasing  or  decreasing  the  capital  or 
the  income. 

The  necessity  for  recording  transactions  in  two  ways 
— consecutive  record  as  to  transactions  and  classified  rec- 
ord as  to  bearing  on  the  elements  involved — gives  rise  to 
two  general  classes  of  books  found  in  bookkeeping,  viz., 
journals  and  ledgers. 


INTRODUCTION  7 

8.  The  Journal  is  an  original  record  of  daily  trans- 
actions and  events,  written  in  the  order  of  their  occur- 
rence. In  this  book  all  transactions  of  a  given  day  are 
to  be  found  in  one  portion,  regardless  of  the  accounts  af- 
fected by  the  transactions. 

Formerly,  the  matter  recorded  in  the  book  now 
known  as  the  journal  was  divided  into  (1)  the  continu- 
ous account  of  the  particulars  of  the  transactions,  writ- 
ten in  a  "day  book,"  (2)  the  indication  of  the  accounts 
to  be  debited  or  credited  as  a  result  of  the  transactions 
written  in  a  "journal."  This  division  of  record  is  now 
little  used  in  the  United  States,  since  it  is  very  easy  to 
indicate  accounts  to  which  posting  is  to  be  made  along 
with  the  narrative  of  transactions;  so  that  the  book  con- 
taining both  the  full  explanation  and  an  indication  of 
the  accounts  affected  is  understood  when  we  speak  of  a 
journal.  The  plain  journal  contains  two  money  columns, 
one  for  debit  entries,  the  other  for  credit  entries. 

The  plain  journal,  referred  to  in  the  preceding  para- 
graph, is  modified  in  many  ways,  in  practical  bookkeep- 
ing, for  labor-saving  and  convenience.  The  principal  pur- 
pose of  these  modifications  is  to  adapt  the  form  used  to 
the  nature  of  the  business,  so  as  to  reduce  the  writing  of 
original  entries  to  the  minimum  and  partially  classify 
the  results  so  as  to  reduce  the  labor,  of  posting  to  the 
accounts.  These  modifications,  or  special  journals  as  they 
are  often  called,  may  be  used  to  contain  given  kinds  of 
routine  entries.  Among  them  are  the  "cash  book," 
which  contains  a  journal  record  of  cash  receipts  and  dis- 
bursements; the  "sales  book,"  which  contains  .a  journal 
record  of  sales,  etc.  All  books  containing  a  special  class 
of  original  entries  from  which  posting  is  done,  may  be 
classed  as  special  journals. 

Another  modification  of  the  original  journal  is  the 
many-column  journal,  in  which  special  columns  are  used 
for  amounts  that  otherwise  would  be  posted  one  by  one 
to  the  same  account  in  the  ledger,  but  by  means,  of  a 
special  column,  the  items  pertaining  to  one  account  can 


8  PRINCIPLES 

be  added  and  the  total  posted  instead.  Many-column 
journals  are  made  containing  from  one  to  forty  or  more 
special  columns. 

The  rules  governing  the  two  modifications  of  the 
journal  referred  to — i.  e.,  the  special  journal  and  the 
many-column  journal — comprise  a  large  part  of  the  study 
of  practical  bookkeeping.  After  the  general  accounting 
basis,  common  to  all  bookkeeping  systems,  is  fairly  in 
mind,  the  choice  of  books  of  first  entry,  and  the  special 
forms  of  these  books  required  under  different  business 
conditions,  are  the  principal  considerations.  The  form  of 
the  books  of  first  entry,  or  journals,  is  governed  by  the 
nature  of  the  business  transactions,  and  would  differ 
very  much  in  banking,  trading,  manufacturing,  farming, 
contracting,  etc. 

9.  The  Ledger  contains  the  accounts.  Entries  are 
posted  to  the  accounts  from  the  journals.  Unlike  the 
journal  forms  which,  for  convenience,  differ  very  much 
in  different  businesses,  the  form  and  arrangement  of  the 
ledger  accounts  are  comparatively  uniform.  The  ac- 
counts are  divided  into  two  classes:  (1)  those  that  ex- 
plain the  condition  of  the  capital  of  the  concern — real  ac- 
counts, (2)  those  that  explain  the  income — nominal 
accounts. 

All  varieties  of  business  are  so  similar  in  their  finan- 
cial organization  that  one  uniform  set  of  real  account 
titles  may  be  looked  for  in  the  ledgers  of  all  concerns. 
By  this  is  not  meant  that  any  one  concern  will  have  need 
of  all  the  regularly  named  and  defined  real  accounts, 
but  that  so  far  as  its  organization  extends,  standard  ac- 
count titles  may  be  selected  to  represent  all  of  its  real 
component  parts. 

The  nominal  account  titles,  however,  though  quite 
extensively  standardized,  are  subject  to  great  variation, 
for  they  represent  the  results  of  ever-expanding  human 
operations  and  sometimes  number  as  many  as  several 
hundred  in  the  same  concern.  They  are  subject  largely 
to  the  special  needs  of  a  given  business. 


INTRODUCTION  9 

10.  Financial  Statements  are  exhibits  containing  in- 
formation bearing  on  the  financial  condition  and  prog- 
ress of  the  business  as  a  whole. 

There  are  two  general  -  phases  covered  in  financial 
statements:  (1)  the  " statement  of  assets  and  liabilities, ' ' 
which  shows  in  detail  the  property  and  indebtedness  of 
the  business  and  the  resultant  net  worth  or  insolvency; 

(2)  the  "statement  of  profit  and  loss,"  which  shows  the 
causes  and  amounts  of  its  incomes  and  expenses  for  a 
given  period  of  time,  and  the  resultant  net  profit  or  loss. 

The  statement  of  assets  and  liabilities  is  a  summary 
of  the  amounts  itemized  in  the  real  accounts;  the  profit 
and  loss  statement,  of  the  amounts  itemized  in  the  nom- 
inal accounts. 

Recapitulation — 1  to  10.  The  main  processes  of 
bookkeeping  are  determined  by  the  principles  of  ac- 
counting, and  consist  of:  (1)  the  making  of  true  original 
entries  in  the  journal  or  in  the  books  taking  the  place  of 
the  journal;  (2)  the  posting  of  the  original  entries  to  the 
ledger,  where  they  appear  classified  in  account   form; 

(3)  the  preparation  of  the  statement  of  a  business  which 
exhibits  the  condition  of  its  finances  and  the  results  of 
its  operations,  as  shown  by  the  records,  in  compact  form 
for  examination  and  comparison. 


CHAPTER  n 

STATEMENT  OF  ASSETS  AND  LIABILITIES 

11.  The  general  term,  financial  statements,  refers 
to  classified  lists  and  summaries  of  the  value  of  things 
owned  by  a  business  concern,  of  its  deb  ts,  of  its  profits 
or  its  losses,  or  of  any  conditions  that  affect  it  in  a  money 
way.  Two  kinds  of  statements  are  commonly  used  to 
summarize  the  results  of  business  enterprises-:  the  state- 
ment of  assets  and  liabilities  discussed  in  this  chapter, 
and  the  statement  of  profit  and  loss  discussed  in  Chapter 
VII.  The  former  summarizes  the  value  of  the  property 
owned  by  the  concern,  and  the  latter,  the  income. 

12.  A  statement  of  assets  and  liabilities  is  designed 
to  show  what  the  person  or  firm  owns  (assets),  what  he 
owes  (liabilities),  and  the  difference  which  is  called  the 
"net  worth' '  if  the  total  owned  is  greater  than  the  total 
owed,  and  the  "net  insolvency"  if  the  total  owed  is 
greater  than  the  total  owned. 

This  statement  shows  the  financial  condition  of  the 
concern;  that  is,  how  much  money  or  property  is  at  the 
disposal  of  the  owner,  what  part  of  the  total  may  be  ex- 
pended on  short  notice,  what  part  is  permanently  in- 
vested, what  part  is  nonproductive,  what  part,  if  any,  is 
intangible.  It  also  shows  what  part  must  be  held  in 
readiness  to  meet  existing  obligations.  The  owner  is 
limited  in  his  operations  by  the  condition  of  the  property. 

The  condition  as  shown  on  a  statement  is  for  one 
date  only,  for  a  business  transaction  always  causes  one 
or  more  of  the  things  in  the  business  to  increase  or  de- 
crease in  value  and  changes  the  statement  to  that  ex- 
tent. It  is  customary  to  prepare  a  statement  of  assets 
and  liabilities  at  the  beginning  of  the  business  history, 
and  once  annually  thereafter.  It  is  often  made  on  Janu- 
ary 1,  each  year,  or  if  the  nature  of  the  business  is  such 
that  the  operations  of  the  business  year  close  on  some 

10 


STATEMENT  OF  ASSETS  AND  LIABILITIES  11 

other  date,  the  most  convenient  date  is  used;  as  May  1, 
July  1,  etc.  The  statement  is  made  monthly,  when  the 
nature  of  the  business  is  such  as  to  make  frequent  com- 
parisons desirable.  Such  a  statement  is  made  when  re- 
quired by  bankers  or  creditors  who  desire  to  satisfy 
themselves  as  to  the  ability  of  the  concern  to  pay  its 
debts.  The  amount  of  a  concern's  resources  is  an  impor- 
tant matter  in  determining  its  credit,  or  capacity  to  bor- 
row money.  The  statement  of  assets  and  liabilities  is 
often  called  a  ''statement  of  condition,"  a  "statement 
of  position,"  a  "statement  of  capital,"  a  "balance 
sheet,"  or  simply  a  "financial  statement." 

It  is  considered  in  three  parts  in  the  following  dis- 
cussion: (1)  the  assets,  (2)  the  liabilities,  and  (3)  the 
net  worth. 

13.  The  Assets  may  include  cash  in  hand,  or 
amounts  owed  to  the  concern  by  others,  property  such 
as  merchandise,  live  stock,  machinery,  land,  buildings, 
etc.,  and  any  other  things  of  cash  value.  The  aim  is  to 
include  in  the  statement  as  assets  everything  that  could 
be  sold  if  the  firm  were  to  discontinue  business  and  wind 
up  its  affairs,  and  to  place  it  in  the  statement  at  a  value 
which  it  would  reasonably  be  supposed  to  bring  if  sold. 

It  is  of  interest  to  the  owner  or  creditor  of  the  per- 
son or  firm  making  the  statement  to  know  not  only  the 
total  value  of  the  assets,  but  also  the  part  which  can  be 
used,  on  short  notice,  for  purchases  or  payment  of  debts. 
Thus,  cash  in  hand  is  immediately  available,  accounts 
and  notes  are  available  within  a  certain  period.  Goods 
kept  in  stock  for  sale  will  not  be  turned  into  cash  ordi- 
narily as  soon  as  accounts  and  notes,  while  property  such 
as  furniture,  machinery,  and  the  buildings  and  land  oc- 
cupied are  not  intended  for  sale,  and  cannot  be  consid- 
ered as  furnishing  funds  to  be  paid  out.  It  is  quite  gen- 
erally the  rule  to  list  the  current  (quickly  available) 
assets  at  the  top  of  the  list  in  order  that  they  may  be 
compared  readily  with  current  payments  to  be  made, 
while  assets  not  intended  for  sale  or  disposition  are 
placed  lower  down. 


12  PRINCIPLES 

Where  of  sufficient  importance  and  extent,  the  as- 
sets are  considered  in  several  groups.  Among  these 
groups  are: 

Current  assets,  consisting  of  cash,  accounts,  notes 
and  property  that  is  to  be  converted  into  cash  in  the 
regular  order  of  business  at  an  early  date. 

Fixed  assets,  consisting  of  things  owned  for  use,  not 
sale,  and  thus  occupying  a  fixed  place  in  the  business. 
Example:  furniture  and  fixtures,  machinery,  building, 
or  land  owned  for  use. 

Invested  Assets,  consisting  of  things  owned  for  the 
income  to  be  derived  from  them  but  not  for  the  use  of 
the  business;  or  investments  made  to  create  a  fund  to 
meet  some  future  maturing  debt. 

"Wasting  Assets,  consisting  of  properties  which  are 
being  drawn  upon  and  thus  losing  value  gradually,  as 
mines  and  timberland. 

Deferred  assets,  consisting  of  payments  made  for  ex- 
penses which  should  apply  in  part  to  a  future  time  and 
are  carried  as  assets  until  charged  off,  part  at  a  time, 
during  several  periods.  Example :  the  expenses  of  or- 
ganizing a  company,  paid  at  once  but  charged  to  expense 
in  parts  during  several  periods,  and  meantime  carried 
as  an  asset. 

Such  distinctions  as  "intangible,"  "speculative," 
and  "contingent"  refer  to  different  classes  of  assets. 

Assets  are  resources  of  the  business  and  a  statement 
of  assets  and  liabilities  is  often  called  a  statement  of 
"resources  and  liabilities."  The  term  "resources," 
however,  is  not  so  much  favored  by  accountants  in  this 
connection.  It  is  a  more  general  word  and  might  apply 
to  things  which,  though  advantageous  to  the  owner  of 
the  business,  really  have  no  salable  value. 

14.  The  Valuation  placed  on  assets  is  an  important 
matter,  since  property  entered  in  the  statement  greatly 
above  or  below  its  real  value  would  cause  the  total  to  be 
misleading.  Persons  often  place  entirely  different 
valuations  on  the  same  thing,  and  nothing  is  more  com- 
mon than  that  one  should  consider  his  property  to  be 


STATEMENT  OF  ASSETS  AND  LIABILITIES  13 

worth  more  than  it  would  bring.  For  this  reason,  it  is 
generally  conceded  that  property  should  be  entered  "at 
cost,"  since  the  purchase  price  of  anything  is  the  last 
agreement  between  persons  as  to  how  much  it  is  worth. 
It  is  true,  however,  that  the  value  of  a  given  thing  does 
not  remain  the  same,  but  may  become  greater  or  less 
with  the  lapse  of  time.  When  the  same  piece  of  prop- 
erty is  included  in  a  statement  year  after  year,  it  is  con- 
sidered safer  always  to  enter  it  at  cost,  and  if  the  value 
has  depreciated  to  deduct  the  evident  depreciation,  thus 
basing  the  revision  on  the  cost.  Therefore,  the  cost  is 
considered  the  safest  basis  to  work  from  in  establishing 
the  value.  On  the  other  hand,  property  may  greatly  ap- 
preciate in  value,  and  such  appreciation  may  be  noted. 
But  a  valuation  placed  on  any  single  thing  at  the  outset 
is  entered  in  the  books,  where  it  remains,  and,  to  distin- 
guish it  from  later  estimates,  is  called  the  "book  value." 
In  preparing  a  statement  which  includes  items  of 
which  the  cost  cannot  be  ascertained,  it  is  necessary  to 
fix  a  valuation  upon  such  items  by  the  safest  means 
possible. 

15.  The  Liabilities  of  a  concern  include  all  debts 
which  are  to  be  paid  out  of  the  assets.  These  may  be 
current  liabilities  such  as  accounts  or  notes  payable  to 
others.  The  current  liabilities  are  usually  placed  at  the 
top  of  the  list  of  liabilities  to  afford  a  convenient  com- 
parison with  the  current  assets. 

Besides  current  liabilities,  other  groups  of  liabilities 
may  be  considered  as  opposed  to  corresponding  groups  or 
items  of  assets.  Example:  a  loan  payable  some  years 
hence  as  opposed  to  an  invested  fund  which  is  set  aside 
to  meet  it. 

16.  The  Net  Worth  is  the  difference  between  the 
sums  of  assets  and  liabilities.  It  is  the  remainder  at  the 
disposal  of  the  person  or  firm  after  applying  the  assets 
to  the  settlement  of  all  debts.  It  is  also  called  the  net 
capital,  or  where  the  capital  is  set  at  a  fixed  amount,  the 
excess  may  be  termed  "surplus." 


14  PRINCIPLES 

17.  The  Form.  The  statement  is  made  for  the  pur- 
pose of  exhibiting  the  condition  in  brief  compact  form. 
Asset  amounts  always  are  written  in  the  left  column, 
liabilities  in  column  to  the  right.  The  excess  of  assets 
over  liabilities  is  written  in  the  same  column  as  the 
liabilities,  as  a  balance  completing  the  equality  of  left 
and  right  columns.  A  very  compact  statement  of  assets 
and  liabilities  is  illustrated  in  model  Forms  1  to  3.  A 
more  elaborate  statement  is  illustrated  in  model  Form  5. 

The  property  and  debts  of  persons  or  firms  as  a  gen- 
eral rule  can  be  itemized  under  a  few  general  divisions. 
Among  these  divisions  are  cash,  accounts  receivable, 
notes  receivable,  stocks,  bonds,  merchandise,  goods  for 
sale  or  use,  furniture  and  fixtures,  equipment,  plant  and 
real  estate.  The  liabilities  commonly  are  included  under 
a  very  few  general  headings ;  among  them  are  accounts 
payable,  notes  payable,  mortgages  payable,  bonds 
payable. 

The  statement  may  be-  so  compact  that,  while  it  af- 
fords a  view  of  the  whole,  it  does  not  go  into  detail  as 
much  as  may  be  desired.  To  supplement  this  informa- 
tion the  details  explaining  any  one  item  may  be  written 
on  separate  schedules  and  attached  as  explained  here- 
after. 

18.  Schedules,  or  lists,  may  be  made  showing  the 
items  of  which  the  total  only  appears  on  the  statement. 
Lists  of  furniture  and  fixtures,  equipment,  notes  receiv- 
able, notes  payable,  and  other  lists  may  be  made,  and 
attached  to  the  statement  so  far  as  they  are  needed  to 
explain  fully  any  of  the  items. 

18  B.  The  Inventory  of  merchandise  is  usually  the 
most  important  schedule  attached  to  the  statement  of  a 
business.  This  is  a  list  of  all  goods  for  sale  at  the  time 
the  statement  is  made.  The  items  making  up  the  in- 
ventory should  be  extended  at  cost  price  and  the  total 
found.  The  total,  however,  should  be  reduced  by  the 
estimated  depreciation  in  value  due  to  deterioration  in 
quality  or  loss  in  market  value  of  any  of  the  items. 


STATEMENT  OF  ASSETS  AND  LIABILITIES  15 


Not  infrequently  certain  kinds  of  goods  or  merchan- 
dise will  increase  in  market  value  while  awaiting  sale. 
Such  increase  should  not  be  added  to  inventory  value  for 
the  reason  that  the  increase  is  estimate  and  not  fact  un- 
til realized  by  actual  sale.  The  best  gauge  of  the  value 
of  property  is  the  consideration  actually  given  in  the  last 
bargain  and  sale,  and  not  an  estimate  of  what  the  prop- 
erty might  be  sold  for.  However,  the  sum  set  by  the 
purchase  price  must  be  reduced,  when  the  value  has  evi- 
dently decreased,  because  safe  business  management  de- 
mands that  any  impairment  of  the  assets  be  noted. 

Other  items  of  value  not  included  under  regular 
general  headings  in  the  statement,  are  also  listed  and  in- 
cluded by  inventory,  such  as  inventor  of  accrued  inter- 
est, inventory  of  miscellaneous  property  or  debts. 

19.  Relation  of  Statement  to  Books.  Although  the 
statement  of  assets  and  liabilities  is  the  summary  of  the 
entire  property  resources  of  the  concern,  it  exhibits  the 
condition  on  one  date  only.  As  business  progresses,  the 
parts  of  the  business  differentiated  m  tl*e  statement  are 
likely  to  increase  or  decrease  in  quantity.  Thus,  cash 
received  will  increase  the  amount  of  cash  on  hand; 
cash  paid  will  decrease  it.  Accounts  receivable  col- 
lected will  decrease  the  total  of  accounts  receivable  on 
hand;  sales  on  account  will  increase  it.  Merchandise, 
furniture,  equipment,  or  other  classes  of  property  pur- 
chased will  increase  the  total  quantity  and  the  total  value 
of  the  particular  kind  of  goods  purchased,  while  the  sale 
of  any  of  these  articles  will  decrease  the  remaining  quan- 
tity and  value  of  the  kind  sold. 

In  order  that  each  item  in  the  statement,  which  is 
limited  to  a  given  date,  may  be  shown  together  with  sub- 
sequent increases  and  decreases  on  any  date,  a  ledger 
section  of  real  accounts  is  opened.  Each  item  in  the 
statement  is  given  a  ledger  page,  or  other  sufficient 
space,  the  name  of  the  item  is  placed  as  a  heading,  or 
title,  at  the  top ;  and  the  book  value  is  placed  in  the  left, 
or  debit,  of  two  columns  as  in  the  statement.     The  cost 


16  PRINCIPLES 

of  additions  to  the  quantity  under  any  heading  is  placed 
in  the  left  column,  and  the  cost  of  any  quantity  taken 
away  is  placed  in  the  column  to  the  right  under  the  head- 
ing. By  this  means,  changes  in  the  book  value  of  all 
items  comprising  the  statement  of  assets  and  liabilities 
so  far  as  those  changes  are  brought  about  by  purchase, 
sale  or  transfer,  are  noted  in  separate  accounts, 

The  account  headings  in  the  ledger  need  not  be 
exactly  the  same  as  the  divisions  in  the  statement,  for 
the  statement  is  condensed,  and  one  item  in  the  state- 
ment may  correspond  with  several  accounts  in  the 
ledger.  Also,  new  ledger  accounts  may  be  opened  at  any 
time  for  assets  acquired  or  liabilities  incurred  after  open- 
ing the  business.  But  the  mere  matter  of  condensation 
in  the  statement  or  expansion  in  the  ledger  should  not 
obscure  the  main  idea  that  the  accounts  of  assets  and 
liabilities  in  the  ledger  comprise  a  "running  statement" 
of  condition. 

19  B.  Statements  of  assets  and  liabilities  taken  at 
the  close  of  any  accounting  period  are  written  from  the 
results  shown  by  the  accounts  of  assets  and  liabilities. 
The  amounts  taken  to  the  statement  are  the  account  bal- 
ances, with  such  revisions  in  valuation  as  could  not  be 
entered  conveniently  in  the  accounts. 

Recapitulation  11  to  20.  A  statement  of  assets  and 
liabilities  is  made  to  show  the  net  worth  or  insolvency  of 
the  business.  It  consists  of  a  listing  of  all  assets  against 
all  liabilities,  showing  the  difference,  which  is  net  worth, 
if  assets  exceed  the  liabilities,  or  net  insolvency,  if  the 
liabilities  exceed  the  assets. 

It  is  important  that  no  items  of  value  be  entered  in 
a  financial  statement  at  more  than  their  asset  value, 
especially  when  such  items  are  subject  to  waste,  shrink- 
age, or  depreciation. 

As  a  guide  to  a  correct  valuation,  current  property 
should  first  be  entered  in  detail  on  schedules,  where  the 
cost  is  shown  and  appropriate  deductions  for  diminish- 


STATEMENT  OF  ASSETS  AND  LIABILITIES  17 

ment" are  made,  after  which  the  net  amount  or  amounts 
are  carried  to  the  financial  statement  in  the  column  of 

assets. 

Fixed  property  should  be  earried  to  the  statement 
at  cost,  but  diminishment  in  value  should  be  deducted 
on  the  statement  from  the  cost,  leaving  the  present  value 
of  the  property  to  be  extended  in  the  column  of  assets. 

Care  should  be  taken  to  include  all  liabilities  at  their 
amounts  when  the  statement  is  made  in  the  column  of 
liabilities. 

The  statement  of  assets  and  liabilities  taken  at  the 
beginning  of  business  is  the  basis  for  opening  the  real 
accounts  in  the  ledger.  The  results  shown  in  the  real  ac- 
counts are  again  summarized  in  statements  of  assets  and 
liabilities  subsequently  taken. 


CHAPTER  III 


PLAN  OF  LEDGER 

21.  The  Ledger  is  the  book  of  accounts.  Each  ac- 
count is  identified  by  a  distinctive  heading.  The  account 
heading  designates  the  part,  process,  operation,  or  cir- 
cumstance that  a  business  man  finds  important  in  itself 
as  having  separate  financial  weight  in  summing  up  the 
condition  or  progress  of  the  entire  business.  This  finan- 
cial weight  is  expressed  by  debits  and  credits. 

In  a  modern  accounting  plan,  four  kinds  of  simple 
accounts  are  used,  divided  into  two  classes,  real  and 
nominal.  To  these  four  may  be  added  the  mixed  ac- 
count, formerly  common,  but  now  practically  eliminated 
from  the  best  bookkeeping  systems.  In  addition  to  the 
four  or  possibly  five  kinds  mentioned,  it  seems  most  con- 
venient to  consider  as  a  separate  kind,  the  accounts  of 
net  worth,  which  are  summaries  of  the  real  accounts; 
and  the  accounts  of  profit  and  loss,  which  are  summaries 
of  the  nominal  accounts. 

(1)  Accounts  of  Assets.  These  show  under  their 
classified  headings:  as  debits,  the  book  value  of  the 
things  owned  by  the  person  or  firm;  as  credits,  the  book 
value  of  anything  removed  from  the  classification  in 
which  it  previously  appeared  as  a  debit. 

A  credit  in  an  asset  account  serves  to  annul  in  whole 
or  in  part  a  debit  previously  made  in  the  account,  both 
debit  and  credit  referring  to  the  same  thing. 

Example.  A  certain  firm  under  the  heading  "Cash," 
enters  as  a  debit  the  amount  of  money  on  hand  at  beginning, 
$1000.  Of  this  amount,  $50  was  paid  out,  the  expenditure  being 
shown  by  crediting  the  account.  Later,  $100  of  the  amount  on 
hand  was  placed  in  a  savings  bank  and  considered  as  set  aside 
for  some  special  purpose.  Cash  would  be  credited.  The  account 
would  then  show  a  debit,  $1000  partially  annulled  by  credits,  $150. 
leaving  a  remainder  of  $850  as  cash  on  hand,  to  be  used  in  the 
ordinary  business  transactions.  Example:  "Delivery  Equip- 
ment" is  a  heading  under  which  four  cars  costing  $600  each  may 

18 


PLAN  OF  LEDGER  19 

be  debited.  The  book  value  would  be  $2400.  Later,  one  of  the 
cars  is  sold.  The  account  would  be  credited  $600.  The  balance 
of  the  account  would  show  the  book  value  of  the  cars  remaining. 
Note. — As  a  principle,  the  credit  entry  for  the  sale  of  an 
asset  is  in  the  same  amount  as  the  previous  debit  for  the  cost  of 
the  same  thing,  regardless  of  the  price  received.  In  the  last 
example,  if  the  car  costing  $600  were  sold  for  $400,  the  Equip- 
ment account  would  be  credited  $600,  thus  annulling  the  pre- 
viously made  debit  for  the  cost  of  the  sold  car.  The  amount  lost, 
$200,  would  be  carried  to  a  nominal  account,  as  explained  later. 
If  credited  in  the  Equipment  account  at  $400,  the  actual  proceeds 
of  the  sale,  the  account  would  thereby  become  "mixed,"  and  the 
account  balance  would  not  be  reliable  as  exhibiting  either  the 
book  value  of  the  remaining  cars  or  the  loss  on  the  sale  made, 
until  such  time  as  the  mixture  would  be  separated. 

(2)  Accounts  of  Liabilities.  These  show  under  sep- 
arate headings:  as  credits,  the  amounts  owed  to  outside 
persons  or  firms;  as  debits,  the  amounts  of  reduction  in 
the  sums  owed. 

Example:  Under  the  heading  of  the  person's  name,  John 
Dale,  for  instance,  $100  may  be  placed  in  the  credit  column,  a 
sum  which  the  firm  has  agreed  to  pay  him.  Later  the  firm  pays 
him  $50  on  this  account.  The  amount  is  entered  in  the  debit 
column.  Later,  John  Dale  agrees  that  the  amount  credited  him, 
$100,  is  $10  more  than  it  should  be.  This  amount  would  be  en- 
tered in  the  debit  column.  The  balance  of  the  account  would 
show  a  liability  of  the  remainder,  $40. 

Summary  of  Assets  and  Liabilities.  The  excess  of  the 
total  assets  over  the  total  liabilities  is  entered  as  a  credit 
in  an  account,  or  accounts,  of  proprietorship,  or  capital. 
The  accounts  of  proprietorship  show  the  net  worth  of  the 
business  concern. 

(3)  Accounts  of  Incomes.  These  show  as  credits, 
under  separate  descriptive  headings,  the  amounts  earned 
or  gained;  as  debits,  deductions  from  the  amounts 
earned.  Thus,  the  amount  of  goods  sold  is  credited  to 
' '  Sales, ' '  the  amount  of  interest  received  to  i '  Interest  In- 
come,"  etc. 

(4)  Accounts  of  Expenses.  These  show  as  debits 
the  value  of  things  regarded  as  consumed,  or  losses  sus- 
tained in  conducting  the  business;  as  credits,  deductions 
from  the  amounts  previously  debited  as  consumed.  Thus, 
a  single  account  headed  " Expense"  may  be  debited  with 
all  such  payments,  or  the  expenses  may  be  divided  into 


'20  PRINCIPLES 

several  groups  with  more  specific  headings,  such  as 
"Building  Expense,"  "Interest  Expense,"  "Commissions 
Paid,"  etc. 

Summary  of  Incomes  and  Expenses.  The  income  and 
expense  totals  are  combined  at  the  end  of  an  accounting 
period  in  a  Profit  and  Loss  account;  incomes  on  the 
credit  side,  expenses  on  the  debit  side,  showing  as  a  re- 
sult of  all  debits  and  credits  assembled,  a  net  profit  or  a 
net  loss  for  the  period. 

(5)  As  noted  above,  all  accounts  found  in  a  ledger, 
except  the  summaries  found  in  the  proprietorship  and 
profit  and  loss  accounts,  may  be  classed  so  as  to  exhibit 
one  of  four  things;  viz.,  an  asset,  a  liability,  an  income, 
or  an  expense  amount.  And  it  is  desirable  that  the  ac- 
counts be  planned  so  as  to  come  under  one  of  these  four 
groups,  since  by  so  doing,  the  results  shown  by  the  ledger 
are  easily  understood  and  show  day  by  day,  without  re- 
adjustment, the  condition  and  progress.  An  account  that 
shows  as  a  result  one  only  of  the  four  things  mentioned 
is  called  a  simple  account.  But,  occasions  arise  where  it 
may  be  thought  necessary  to  use  mixed  accounts,  that  is, 
accounts  from  which  two  or  more  results  are  to  be  found, 
as  an  asset  and  an  income  in  the  same  account.  In  for- 
mer times  mixed  accounts  were  used  quite  freely,  but 
since  it  is  necessary  in  such  accounts  to  separate  the  sev- 
eral elements,  one  from  another,  before  the  significance 
of  the  account  is  apparent,  mixed  accounts  are,  generally 
speaking,  too  indefinite  for  practical  purposes,  and  do 
not  seem  to  be  necessary  in  ordinary  bookkeeping. 

In  the  following  work,  each  of  the  above  kinds  of 
accounts  is  discussed  in  a  separate  chapter.  But  before 
considering  accounts  more  closely,  it  is  well  to  fix  in  mind 
an  entire  ledger  in  which  there  are  several  sections  of  ac- 
counts, which  follow  the  order  illustrated  in  the  follow- 
ing diagram: 


PLAN  OF  LEDGER " 
LEDGER 


21 


(divided) 


REAL   ACCOUNTS 


NOMINAL  ACCOUNTS 


(divided) 


(divided) 


Asset   Accts. 


Liability   Accts^, 


Expense  Accts. 


(Dr.  balances) 


(Cr.  balances) 


(Dr.  balances) 


Income  Accts. 


(Cr.  balances) 


(summarized) 


(summarized) 


NET  WORTH  ACCOUNTS 


PROFIT  AND  LOSS  ACCOUNT 


The  ledger  as  a  whole  will  be  considered  in  two 
parts,  which  will  be  called  "the  section  of  real  accounts," 
and  "the  section  of  nominal  accounts." 

The  section  of  real  accounts  comprises  in  effect  a 
running  or  current  statement  of  assets  and  liabilities. 

The  section  of  nominal  accounts  likewise  comprises 
a  running  statement  of  incomes  and  expenses. 

It  is  thought  that  the  student  will  secure  a  quicker 
and  better  idea  of  the  significance  of  accounts  by  viewing 
them  as  found  in  a  well  arranged  ledger  following  the 
order  of  the  diagram. 

21  A.  The  Forms  of  Ledger  Account.  The  ordinary 
form  of  the  account  may  be  found  in  Model  Form  10  E, 
which  serves  as  an  illustration  of  an  entire  ledger  page. 
The  account  is  divided  by  vertical  ruling  in  the  center, 


22  PRINCIPLES 

the  space  at  the  left  is  for  debits  and  at  the  right  for 
credits.  Comparing  with  Model  Form  10  C,  observe  that 
debit  and  credit  sides  are  spaced  off  in  the  same  way, 
making  (1)  column  for  dates,  (2)  column  for  explana- 
tions, (3)  column  for  post  marks,  (4)  column  for  amounts 
of  the  debit  or  credit  entries.  "When  a  page  is  filled,  the 
totals  of  the  debit  and  credit  columns  are  carried  for- 
ward to  the  next  succeeding  page  (see  Form  10  E  for- 
warded to  Form  10  F).  The  account  is  balanced  by  writ- 
ing the  difference  between  debit  and  credit  totals  in  the 
lesser  side  (ordinarily  in  red  ink),  addition  and  closing 
lines  are  ruled,  after  which  the  account  is  continued  by 
placing  the  balance  below  the  ruling  on  the  side  which 
was  previously  shown  to  be  greater. 

Ledger  accounts  are  ruled  In  many  other  forms  suited  to 
different  purposes.  Model  Form  17  D  illustrates  an  account  in  a 
three-column  balance  ledger,  wherein  the  debit  and  credit  columns 
are  side  by  side,  and  a  third  column  carries  the  balance.  This 
form  is  often  used  for  customer's  accounts,  where  all  balances  are 
normally  debit  balances.  An  occasional  overpayment  will  result 
in  a  credit  balance  which  in  this  form  of  account  is  entered  in 
red  ink. 

A  form  suited  to  accounts  having  either  debit  or  credit  bal- 
ances is  illustrated  in  Model  Form  27  H.  where  there  are  two 
balance  columns  making  a  four-column  balance  ledger. 

Form  27  Y  is  an  account  in  a  cost  ledger,  ruled  and  printed 
in  suitable  form  for  entry  of  all  amounts  charged  to  a  given 
piece  of  work. 

The  student  will  find  it  advantageous  to  clearly 
understand  two  common  methods  of  rearranging  the  ac- 
counts in  order  to  make  either  a  clearer  or  a  more  com- 
pact ledger  exhibit.  The  one  refers  to  subdividing  an 
account  so  that  the  parts  may  be  carried  in  the  ledger 
under  separate  headings;  the  other  refers  to  grouping  a 
number  of  accounts  of  a  common  kind  in  order  that  their 
aggregate  may  be  carried  in  the  ledger  under  one 
heading. 

21 B.  Divided  Account.  This  may  be  illustrated 
by  referring  to  Form  10  D,  wherein  the  proprietor  classi- 
fied his  machinery,  tools,  etc.,  under  the  one  heading, 
Equipment.  Under  this  heading,  the  several  items  mak- 
ing up  the  entire  account  are  explained  as  a  motorcycle 


PLAN  OF  LEDGER  23 

and  a  tool  chest.  He  might  find  it  would  serve  the  pur- 
pose better  to  carry  two  accounts,  one  for  the  motorcycle 
and  another  for  tool  chest  and  the  tools  which  he  was  to 
buy  later,  in  order  to  exhibit  the  cost  of  each  separately. 
In  that  case,  the  two  amounts  would  be  debited  under 
two  separate  headings,  and  the  account,  Equipment, 
would  be  credited  with  the  amounts  redebited,  thus 
closing  it.  This  simple  illustration  will  serve  to  show 
how  accounts  generally  may  be  subdivided  in  order  to 
exhibit  some  classification  of  sufficient  financial  weight 
to  justify  separate  consideration. 

21  C.  Controlling  Accounts.  A  certain  group  of  ac- 
counts of  the  same  kind  may  become  too  numerous,  or  re- 
quire too  much  detail  to  be  carried  in  a  ledger  arranged 
in  the  form  of  a  current  statement  of  all  the  conditions 
of  the  business.  As  an  illustration,  a  ledger  of  200  pages 
— large  enough  to  contain  all  accounts  needed  to  explain 
all  general  phases  of  the  business — could  not  contain  the 
separate  accounts  of  a  thousand  customers,  for  lack  of 
room.  The  customers'  accounts  would  be  placed  in  a 
separate  special  ledger  for  customers'  accounts  only,  and 
the  sums  of  all  debits  and  credits  pertaining  to  the  cus- 
tomers' accounts  would  be  placed  under  one  heading  in 
the  general  ledger.  The  ledger  containing  the  customers ' 
accounts  would  be  called  a  special,  or  subsidiary,  ledger, 
and  the  account  exhibiting  the  aggregate  in  the  general 
ledger  would  be  called  a  controlling  account.  Control- 
ling accounts  are  introduced  in  the  general  ledger  when- 
ever it  is  necessary  to  carry  a  group  of  accounts  of  the 
same  kind  in  a  subsidiary  ledger  or  other  special  record. 


CHAPTER  IV 

ASSET  ACCOUNTS 

22.  Accounts  of  Assets.  We  have  seen  that  in  the 
financial  statement,  the  assets  of  the  business  are  consid- 
ered under  groups.  Current,  fixed  and  invested  prop- 
erty, invested  in  securities,  wasting,  speculative,  de- 
ferred, contingent,  intangible  and  good-will  assets  are 
mentioned.  Regarding  the  ledger  as  a  continuous  and 
daily  revised  statement,  the  accounts  will  be  described  in 
like  order.  The  accounts,  as  a  whole,  should  be  kept  in 
such  a  way  as  to  exhibit  the  amount  of  the  entire  capital 
represented  by  each,  so  far  as  it  is  practicable  and  cus- 
tomary to  do  so. 

23.  The  Current  Asset  Accounts  represent  the 
amount  of  the  entire  capital  that  is  free  to  be  used  in  the 
business  operations.  If  one's  capital  consisted  of  $5000 
in  current  assets  and  $95000  in  fixed  or  invested  assets, 
he  would  be  said  to  have  a  large  proportion  of  his  capital 
' '  tied  up, ' '  in  such  a  way  that  it  could  not  be  immediately 
used,  and  the  business  operations  would  be  hampered  to 
that  extent.  It  has  been  characteristic  of  farm  owners 
that,  though  owning  valuable  land,  they  are  frequently 
short  of  money  and  current  property  with  which  to  do 
business.  The  Federal  Government  has  recognized  this 
condition  by  making  special  provision  for  loans  to 
farmers,  in  order,  among  other  things,  to  supply  them 
with  current  funds  for  operating  the  farms  to  advantage. 

The  merchant  is  able  to  do  a  large  volume  of  busi- 
ness by  reason  of  the  large  proportion  of  his  assets  being 
current,  or  easily  available.  Bankers  recommend  that 
every  effort  be  made  to  keep  the  amount  of  cash,  ac- 
counts, notes  and  merchandise  in  the  right  proportions. 
These,  and  similar  reasons,  suggest  that  the  bookkeeper 
distinguish  the  current  asset  accounts. 

24 


ASSET  ACCOUNTS  25 

23  B.  The  Cash  Account  is  debited  to  show  the 
amount  of  cash  at  beginning.  Additional  receipts  of  cash 
are  debited;  payments  or  other  deductions  from  cash  are 
credited.  The  "account  is  balanced  when  it  is  desired  to 
show  the  remainder. 

This  account  is  the  most  used  and  is  referred  to  the 
most  frequently.  Cash  is  a  part  of  the  business  that  may 
be  stolen  or  lost  most  easily,  and  needs  constant  atten- 
tion. Cash  receipts  and  disbursements  should  be 
promptly  recorded.  The  cash  balance  should  be  easily 
ascertained  by  consulting  the  cash  book.  For  such  rea- 
sons, the  cash  account  is  usually  kept  in  a  cash  book, 
apart  from  the  other  accounts,  where  it  can  be  used  and 
consulted  at  will,  although  it  is  sometimes  kept  in  the 
ledger. 

Cash  Accounts  in  Ledger.  Form  12  C  illustrates  the  cash 
account  in  the  ledger.  The  debits  show  the  amount  at  beginning 
and  subsequent  receipts,  the  credits  show  payments.  All  items 
are  posted  to  this  account  from  a  journal  in  which  full  explana- 
tions can  be  found.  In  the  example,  the  account  is  balanced  at 
the  close  of  Oct.  2,  the  balance  being  carried  down  as  the  begin- 
ning of  Oct.  3. 

One-Page  Cash  Book.  Form  10  A,  illustrates  a  cash  account 
in  which  the  debit  and  credit  columns  are  placed  side  by  side  at 
the  right,  in  order  to  allow  more  room  for  explanations  at  the 
left.  The  cash  account  shown  here  is  kept  in  a  cash  book, 
in  which  the  original  entries  are  made.  A  cash  book  contains 
the  journal  record  of  cash  transactions,  together  with  the  account 
of  cash.  The  account  has  been  balanced  on  the  5th  and  12th  of 
the  month. 

Form  10  B.  This  is  the  same  cash  book  as  10  A,  with  the  ad- 
dition of  the  entries  of  the  ledger  account  titles  and  the  pages  of 
the  ledger  where  they  are  found.  These  page  numbers  are  to  be 
entered  prior  to  posting,  and  serve  as  guides  to  the  pages  in  the 
ledger.  As  each  item  is  posted,  a  check  mark  is  placed  after  the 
page  number.  In  the  form,  the  entries  from  Jan.  1  to  Jan.  5  are 
shown  to  have  been  posted;  the  entries  from  Jan.  6  to  Jan.  12 
are  shown  ready  to  be  posted.  Thus,  the  first  entry  on  Jan.  1 
may  be  found  posted  to  the  credit  of  the  Capital  account  on 
page  3  of  the  ledger.  ( See  Form  10  E. )  The  last  entry  on  Jan. 
5  may  be  found  posted  to  the  debit  of  the  Savings  Fund  account 
on  page  1  of  the  ledger.     (See  Form  10 C.) 

Two-Page  Cash  Books.  Form  13  B,  illustrates  a  cash  book 
wherein  receipts  and  payments  are  entered  on  left  and  right 
pages,  respectively.  The  cash  receipts  are  entered,  after  proper 
explanation,  in  the  first  column,  and,  when  deposited,  the  amounts 
of  the  deposits  are  entered  in  the  second  column.     Likewise  on 


26  PRINCIPLES 

the  credit  side,  checks  for  amounts  paid  out  are  entered  in  the 
first  column  and  totals  carried  to  second  column  at  the  time  de- 
posits are  made.  This  is  a  good  form  of  cash  book  where  cash 
discounts  are  not  common. 

Form  13  L,  illustrates  a  cash  book  of  the  ordinary  two- 
column  form,  but  arranged  with  special  columns  for  cash  dis- 
counts given  and  received,  as  does  also  Form  17  P. 

Form  17  B,  illustrates  an  ordinary  single  entry  cash  book. 

Form  18  C,  illustrates  a  cash  book  with  several  special  col- 
umns, both  debit  and  credit. 

Forms  23  E  and  23  G,  illustrate  a  cash  book  divided  into  two 
books:  the  cash  received  register,  and  the  check  register.  A 
somewhat  different  form  of  the  same  division  is  illustrated  in 
Forms  27  J,  and  27  K. 

Form  13  Q,  illustrates  a  petty  cash  book. 

23  C.    Accounts  of  Temporary  Funds  are  debited  to 

show  the  amounts  set  aside  for  the  object  explained  by 

the  heading;  are  credited  to  show  the  amounts  applied 

out  of  the  fund,  or  withdrawn  for  other  uses. 

Form  IOC.  Certain  amounts  of  cash  may  be  separated 
from  the  general  cash,  and  held  apart  for  some  particular  class 
of  expenditures,  or  for  some  special  purpose  in  a  fund  of  which 
an  account  having  a  descriptive  title  may  be  kept. 

Funds  are  set  up  for  temporary  purposes:  thus,  a 
Contingent  Fund  consists  of  amounts  set  aside  to  pay 
obligations  likely  to  arise,  but  not  yet  fully  determined; 
a  Cashier's  Fund,  or  Imprest  Fund,  consists  of  amounts 
entrusted  to  the  cashier,  out  of  which  he  makes  payments 
as  occasions  arise,  and  reports  the  •  payments,  later,  for 
entry. 

23  D.  Accounts  Receivable  are  debited  to  show  the 
amounts  to  be  collected  from  others  on  book  accounts; 
are  credited,  to  show  reductions  in  the  amounts 
collectible. 

Where  goods  are  sold  on  credit,  the  individual  ac- 
counts receivable  become  a  continual  care,  in  order  to 
make  collections  according  to  terms  and  to  avoid  carry- 
ing past  due  accounts  on  the  books.  To  aid  in  doing  this, 
the  accounts  are  kept  in  somewhat  different  form  under 
different  conditions,  a  brief  survey  of  which  is  here 
given. 

The  heading  of  the  account  is  the  name  of  the  person 
or  firm  who  is  to  pay  it ;  some  exceptions  to  this  rule  be- 


ASSET  ACCOUNTS  27 

> 
ing  noted  later.     In  addition  to  the  name,  the  address 
should  be  added,  if  it  is  needed  in  locating  the  person. 
Other  memoranda  as  to  rating,  or  information  affecting 
the  account,  may  be  added  as  needed. 

In  the  explanatory  space,  debit  side,  may  be  written 
such  descriptions  as  terms  of  sale,  invoice  numbers,  or 
other  data  that  will  aid  either  in  collecting  the  account 
on  time,  or  explaining  the  debit  to  the  customer.  It  is 
often  advantageous  to  explain  credits,  specifying  cash, 
discount,  note,  rebate,  etc.  Of  course,  no  time  should  be 
wasted  in  writing  explanatory  matter  not  really  needed 
in  effecting  the  purpose  of  the  account. 

Form  12  H,  illustrates  some  features  of  an  account  receiv- 
able. The  heading  states  name  and  address  of  a  city  customer. 
The  debits  specify  that  the  customer  is  charged  for  merchandise. 
The  credits  show  that  the  total  debits  were  reduced  by  receipts 
of  cash  in  part,  and  in  part  by  goods  returned.  The  account  may 
be  balanced  at  any  time  to  show  the  remainder. 

Form  17  D,  illustrates  an  account  with  a  customer. 

Both  forms  mentioned  are  accounts  of  retail  sales  which  are 
assumed  to-  be  settled  monthly  and  have  no  cash  discount  offer. 

Form  11  B.  It  is  not  uncommon  to  have  a  number  of  single 
amounts  due  from  as  many  persons,  to  be  settled  in  full  without 
further  debit  entries.  In  such  instances  a  full  ledger  account 
takes  so  much  room  and  causes  so  much  labor  that  a  single  ac- 
count heading  "Sundry  Accounts  Receivable"  may  answer  for  the 
amounts  due  from  a  number  of  persons.  In  the  form  mentioned, 
each  debtor  is  given  a  line,  his  name  is  entered  in  the  explanatory 
space,  and  when  payment  is  received  the  credit  entry  should  be 
posted  on  the  same  line  as  the  debit. 

Form  14  M.  The  C.  O.  D.  (Collect  on  Delivery)  account 
contains  the  charges  to  sundry  customers  for  goods  to  be  deliv- 
ered, and  paid  for  when  delivery  is  made.  In  this  account,  a  line 
is  reserved  for  each  sale,  in  which  is  posted  the  date,  name  of 
buyer  and  amount  on  the  debit  side.  Sometimes  the  sale-number 
or  the  name  of  the  collector  is  entered  instead  of  the  buyer's 
name.  At  any  rate,  the  explanation  should  be  such  as  readily 
to  refer  to  the  item.  When  the  sale  is  delivered  and  the  cash  is 
returned,  a  credit  is  entered  on  the  sale  line  as  the  corresponding 
charge.  The  C.  O.  D.  account  is  kept  among  the  other  customers' 
accounts. 

Place  in  Ledger.    The  accounts  receivable  are  usually 

by  far  the  most  numerous  group  of  accounts,  and  require 

ledger  space  by  themselves.    Where  all  accounts  are  kept 

in  one  ledger,  the  author  recommends  that  after  spacing 

the  ledger  to  contain  all  other  accounts,  the  accounts  re- 


28  PRINCIPLES 

ceivable  be  given  the  remainder  of  the  ledger,  so  as  to 
allow  as  much  room  as  possible  for  the  addition  of  new 
accounts. 

In  a  business  where  it  is  the  rule  to  sell  goods  on 
account,  a  special  ledger  for  the  accounts  receivable  is 
likely  to  be  needed.  When  so  kept,  the  heading  "Ac- 
counts Receivable"  is  carried  in  the  general  ledger  as  a 
controlling  account  (see  Form  18  B),  to  which  is  posted 
monthly  the  debit  and  credit  totals  of  the  items  which  are 
posted  separately,  under  the  names  of  the  persons  owing, 
in  the  several  accounts  of  the  special  ledger. 

23  E.  The  Notes  Receivable  Account  is  debited  to 
show  the  amount  of  the  principal  of  notes  or  acceptances 
owned  by  the  concern;  is  credited,  to  show  payments  or 
other  deductions  from  the  principal  of  the  notes. 

Under  this  heading  are  to  be  included  notes  running 
but  a  few  months,  at  any  rate  not  over  a  year.  Notes 
running  for  a  period  of  years  are  better  classed  as  Long- 
term  Loans  Receivable  in  a  separate  account. 

Notes  ordinarily  draw  interest,  but  interest  on  a  note 
is  not  entered  in  the  Notes  Receivable  account,  for  the 
notes  are  debited  at  face,  and  when  paid,  are  credited  off 
the  account  at  face.  When  the  face  and  interest  of  a 
note  are  collected,  two  credits  are  made — the  face  being 
credited  to  Notes  Receivable  account,  and  the  interest  to 
a  separate  nominal  account  as  explained  later  under 
"Accounts  of  Income." 

Form  11  C  illustrates  a  Notes  Receivable  account  containing 
a  brief  explanation  of  each  note  received.  The  explanation  shows 
the  payer  and  date  due,  sufficient  to  be  a  reminder  of  whom  and 
when  collection  should  be  made.  The  payment  of  notes  is  credited 
on  a  line  with  the  debit,  thus  annulling  that  part  of  the  account. 
A  partial  payment  may  be  credited  above  the  line  as  in  Form  12  D. 
By  this  means  it  is  easy  to  see  which  notes  are  yet  unpaid.  This 
form  may  be  used  where  few  notes  are  handled  and  it  is  not  con- 
sidered advisable  to  keep  a  special  note  record. 

Notes  Receivable  may  very  well  follow  Accounts  Re- 
ceivable in  the  ledger.  When  the  notes  become  too 
numerous  for  full  entry  in  the  general  ledger,  or  it  is 
advisable  to  keep  a  separate  complete  record  of  them, 


ASSET  ACCOUNTS  29 

they  are  entered  by  number  in  a  notes  receivable  record 
(see  Form  13  M),  and  their  totals  are  carried  in  a  con- 
trolling account  headed,  Notes  Receivable. 

23  F.  Jhe  Inventory  Account  is  debited  to  show  the 
value  of  merchandise,  goods  and  other  floating  assets  on 
hand  as  per  inventory  taken  at  the  date  of  entry;  is 
credited,  with  the  amount  standing  as  a  debit  in  the  ac- 
count as  per ,  previous  inventory  replaced  by  the  one 
debited  later. 

Taking  inventory,  or  taking  stock,  is  the  means  of 
finding  the  value  of  the  kind  of  assets  that  cannot  be 
carried  in  asset  accounts  because  they  are  ever  changing 
as  to  things  themselves  or  by  reason  of  accrual,  consump- 
tion, etc.  They  cannot  be  permanently  recorded  as  can 
fixed  property,  but  must  be  investigated  and  listed  on  a 
given  date.  Merchandise  is  ordinarily  the  prominent 
item  in  the  inventory.  Merchandise,  when  continually 
bought  and  sold',  is  constantly  varying  as  to  the  quantity 
and  kind  of  goods  on  hand.  Under  prevailing  bookkeep- 
ing methods,  merchandise  is  debited  at  the  cost  when 
bought,  but  is  credited  when  sold  at  the  selling  price,  so 
that  a  comparison  between  debits  and  credits  lacks  a 
common  unit  of  application.  A  part  of  the  proceeds  from 
sales  represents  the  cost  of  goods  taken  from  stock,  the 
other  part  of  the  proceeds  from  sales  is  income.  If  at 
time  of  sale  the  cost  of  the  goods  sold  had  been  ascer- 
tained by  me^ans  of  a  cost  system,  so  that  cost  could  be 
credited  in  a  Merchandise  account  against  the  cost  of  the 
goods  when  bought,  then  the  Merchandise  account  as 
thus  kept  would  show  day  by  day  a  balance  theoretically 
equal  to  the  value  of  the  goods  on  hand.  This  method, 
referred  to  later,  is  growing  in  favor  and  use.  But,  as 
records  as  ordinarily  kept,  an  account  showing  the  book 
value  of  floating  property  on  hand  at  a  given  date  by 
actual  inventory  is  more  reliable  as  a  basis  for  use  in  a 
statement  of  assets  than  an  account  containing  the 
amounts  of  subsequent  purchases  and  sales.  For  this 
reason  it  is  recommended  that  the  accounts  of  Merchan- 
dise Purchases  and  Merchandise  Sales  be  carried  among 


.30  PRINCIPLES 

the  nominal  accounts,  to  be  disposed  of  at  the  close  of  an 
accounting  period  as  shown  in  a  later  chapter. 

The  Inventory  account,  then,  shows  floating  assets  at 
book  value  on  a  certain  date  only,  usually  when  an  an- 
nual or  other  periodic  statement  is  made.  Its  amount 
must  be  raised  or  lowered  by  estimate,  for  statement  pur- 
poses, during  the  interval. 

The  assets  in  the  inventory  list  consist  of  merchan- 
dise or  other  goods  for  sale  or  use,  items  of  various  kinds 
collectible  from  others,  but  not  already  on  the  books,  such 
as  interest  accruing  on  accounts  or  notes  receivable, — 
anything  of  value  for  which  no  current  account  is  kept. 
They  may  all  be  entered  under  one  title,  Inventory,  each 
different  kind  being  explained  in  a  separate  line;  or,  if 
of  sufficient  importance,  the  general  inventory  account 
may  be  divided,  and  the  several  kinds  of  assets  be  given 
separate  accounts  such  as  "Merchandise  Inventory/' 
"Grain  Inventory,"  "Live  Stock  Inventory,"  "Interest 
Inventory,"  etc. 

The  cost  of  merchandise  is  the  purchase  price  and  all 
the  expenses  necessary  to  lay  the  goods  down  in  the  sales 
room.  These  expenses  consist  of  freight  and  transfer 
charges  necessary  to  place  same  in  the  store.  It  is  cus- 
tomary for  large  stores  to  purchase  goods  long  before 
they  are  to  be  placed  in  the  sales  room.  Such  goods  are 
left  in  warehouses  for  storage  until  the  sales  season  ar- 
rives. The  warehouse  expenses  with  the  -freight  and 
transfer  expenses,  are  included  as  part  of  the  cost  of  the 
merchandise. 

When  the  same  articles  have  been  bought  at  different 
times  for  different  prices,  the  last  price  paid  is  often 
used.  After  the  cost  of  merchandise  is  found,  deprecia- 
tion in  value  of  any  of  the  articles  should  be  taken  into 
account  before  the  real  value  can  be  determined.  (See 
Form  4H.) 

Form  13  E  illustrates  the  Inventory  account.  On  Nov.  1,  the 
book  value  of  merchandise  on  hand  was  entered  as  a  debit.  On 
Nov.  30,  a  later  inventory  was  entered  as  a  debit.  This  later  in- 
ventory replaced  the  one  previously  entered,  as  was  indicated  by 
the  credit  entry  annulling  the  debit  of  Nov.  1. 


ASSET  ACCOUNTS  31 

Under  the  same  heading  could  have  been  placed  the  amount 
of  material  previously  charged  to  Expense,  but  not  used  up  to 
that  date,  explained  by  writing  "Expense"  in  the  same  way  in 
the  explanatory  space,  as  "Mdse."  was  written.  So  also  Inter- 
est accrued  or  any  other  inventoried  items.  At  the  close  of  an 
accounting  period  each  of  these  entries  would  be  annulled  by  a 
credit  entry,  and  the  later  inventories  debited. 

23  G.  The  Merchandise  Account  (as  recommended 
when  the  account  is  headed  "Merchandise")  is  debited 
to  show  the  cost  of  merchandise  on  hand  at  beginning 
and  to  show  the  cost  of  subsequent  additions  to  merchan- 
dise ;  is  credited  to  show  the  cost  of  merchandise  sold,  or 
otherwise  removed  from  the  merchandise  classification. 
This  account  takes  the  place  of  the  Inventory  account  so 
far  as  merchandise  is  concerned.  Since  goods  are  both 
debited  and  credited  at  cost,  the  account  balance  is  pre- 
sumed to  be  the  cost  of  merchandise  on  hand.  This  re- 
sults in  placing  Merchandise  account  on  the  same  footing 
as  other  simple  asset  accounts.  A  Merchandise  account 
does  not  do  away  with  inventory  taking,  but  it  serves  as 
a  controlling  account  which  the  inventory  is  to  verify. 
Discrepancies  between  the  Merchandise  account  balance 
and  the  actual  inventory  should  be  reconciled  by  an 
adjustment  entry. 

To  keep  a  current  merchandise  account  at  cost  in- 
volves the  use  of  a  "cost  system"  suitable  for  quickly 
finding  the  cost  of  all  articles  sold. 

Merchandise  Account  Divided.  Additions  to  the  cost 
of  merchandise  in  stock  may  come  from  several  sources 
which  the  manager  of  a  business  may  find  it  advantageous 
to  consider  under  separate  account  headings.  The 
account  may  be  divided  into  the  following  or  other  sub- 
sidiary accounts,  all  of  which  close  monthly  or  at  the  end 
of  an  accounting  period  into  the  general  merchandise 
account : 

(1)  Invoice  Purchases;  debited  to  show  the  invoice 
cost  of  the  goods  only ;  credited,  to  show  the  invoice  cost 
of  any  goods  returned  to,  or  other  deductions  allowed  by 
the  firm  from  whom  purchased ;  or,  where  it  is  the  policy 
of  the  firm  to  consider  cash  discounts  on  invoices  as  a  de- 
duction from  the  cost,  cash  discounts  should  be  credited 


32  PRINCIPLES 

also.  The  result  is  the  net  invoice  of  cost  of  goods  to  be 
carried  periodically  as  a  debit  in  the  Merchandise 
account. 

(2)  Freight  In;  debited  to  show  the  freight  and 
transfer  charges  on  merchandise  received;  credited,  to 
show  any  reductions  for  overcharges  or  rebates  diminish- 
ing the  freight  cost.  The  result,  the  net  freight,  is  car- 
ried periodically  to  the  Merchandise  account. 

(3)  Returned  Goods;  debited  to  show  the  cost  of 
goods  returned  after  being  sold  to  customers.  The  total 
is  carried  to  the  debit  of  merchandise. 

23  H.  The  Merchandise  Account  (as  often  kept,  but 
not  recommended)  is  debited  to  show  the  cost  of  mer- 
chandise at  the  beginning,  and  to  show  the  cost  of  subse- 
quent merchandise  purchases  or  other  merchandise  ex- 
penses, return  goods,  etc.,  (thus  far  agreeing  with  23  F 
above) ;  it  is  credited  to  show  the  total  amount  of  sales, 
or  other  disposition  of  merchandise.  When  thus  kept, 
the  account  is  a  mixed  account,  since  the  account  balance 
shows  neither  the  book  value  of  goods  in  stock,  nor  the 
profit  from  sales,  but  both  together.  These  are  separated 
at  the  close  of  an  accounting  period  by  crediting  the  ac- 
count with  the  closing  inventory,  the  balance  after  that 
credit  being  profit  or  loss.  The  account  is  ruled  and  the 
inventory  is  carried  down  (debit  side)  as  a  continuation 
of  the  account  into  the  next  accounting  period. 

This  form  of  the  Merchandise  account  was  formerly 
prevalent,  and  is  now  extensively  used.  For  that  reason, 
it  is  mentioned  here,  since  the  student  is  likely  to  meet 
with  it.  Though  the  principle  governing  it  may  be  ap- 
plied probably  to  advantage  in  some  instances,  it  does  not 
seem  desirable  to  represent  this  most  important  ele- 
ment in  many  businesses,  by  using  a  mixed  account. 

231.  The  Manufactured  Goods  Account,  Finished 
Goods  account,  or  Completed  Product  account  is  debited 
to  show  the  factory  cost  of  the  goods  made  by  the  con- 
cern; is  credited  to  show  the  cost  of  the  goods  sold  or 
otherwise  disposed  of. 


ASSET  ACCOUNTS  *  33 

The  cost  consists  of  three  items:  materials,  pro- 
ductive labor,  and  manufacturing  expenses  or  factory 
overhead,  referred  to  in  Prin.  23  J-K-L.  This  account  is 
handled  in  the  same  way  as  the  Merchandise  account  ex- 
plained in  Prin.  23  G. 

23  J.  The  Materials  Account  is  debited  to  show  the 
cost  of  material  to  be  made  into  manufactured  articles ;  is 
credited  to  show  the  cost  of  materials  used  in  making  the 
manufactured  articles.  The  balance  of  this  account 
should  show  cost  of  materials  in  stock.  This  is  a  manu- 
facturing account.  It  may  be  divided,  t6  suit  the  pur- 
pose, into  accounts  for  several  classes  of  materials. 
Among  such  distinctions  are: 

Kaw  Materials,  consisting  of  material  in  its  raw  state, 
as  lumber,  ore,  sand,  etc. 

Finished  Parts,  consisting  of  materials  on  which  some 
work  is  done  after  which  it  is  returned  to  stock. 

The  raw  material  of  one  factory  is  frequently  the 
completed  product  of  another,  so  that  the  divisions  of 
materials  in  any  factory  is  made  in  accordance  with  the 
classification  applicable  to  that  particular  concern. 
Materials  may  be  carried  in  as  many  accounts  as  desired. 

231C.  The  Labor  Account  is  debited  to  show  the 
amount  of  wages  paid  workmen  in  a  shop  or  factory;  is 
credited  to  show  the  labor  reapportioned  as  a  part  of  the 
cost  of  the  things  manufactured.  The  balance  of  this  ac- 
count shows  the  amount  of  labor  on  material  in  the  mak- 
ing, and  to  be  apportioned  to  manufactured  articles  when 
they  are  completed.  This  account  is  divided  into  Pro- 
ductive Labor,  and  Nonproductive  Labor;  or  it  may  be 
divided  by  departments,  as  "Productive  Labor  Dept.  A," 
Dept.  B,  etc. 

23  L.  Factory  Overhead  is  debited  to  show  the 
amount  of  factory  or  shop  expenses  that  are  chargeable 
to  the  things  made  as  a  part  of  the  cost  of  making ;  cred- 
ited, to  show  the  overhead  reapportioned  to  completed 
products. 

23  M.     Grain,  Produce,  Etc.    The  accounts  of  goods 


34  PRINCIPLES 

kept  for  sale  or  consignment  that  are  not  very  well  called 
"merchandise"  may  be  kept  under  headings  similar  to 
these  named.  They  are  probably  best  included  in  Inven- 
tory account  in  most  instances,  or  they  may  be  handled 
as  in  the  Merchandise  account,  depending  on  conditions. 

24.  Fixed  and  Invested  Property  Accounts  refer  to 
property  of  a  permanent  nature  owned  by  the  concern  for 
use  either  in  conducting  the  business  or  in  bringing 
income. 

The  items  comprising  the  fixed  property  are,  as  a 
rule,  easily  distinguishable  things,  such  as  building,  furni- 
ture, machinery,  delivery  equipment,  etc.  These  things 
remain  in  the  business  year  after  year  so  that  it  is  econ- 
omy of  time  to  plainly  name  them  when  first  entered  in 
ledger  accounts,  where  the  book  value  of  each  remains  as 
a  permanent  record. 

Thus,  under  the  heading  "Furniture  and  Fixtures" 
may  be  entered  on  separate  lines,  office  desk,  $28.00; 
bookkeeper's  desk,  $16.50;  3  showcases,  $78.40;  cash 
register,  $210,  etc.  The  purpose  is  to  so  describe  the  items 
that  the  cost  of  any  one  thing  of  importance  may  be  as- 
certained by  referring  to  the  account. 

Should  the  items  in  an  account  be  too  numerous  for 
convenient  space  in  the  ledger,  they  may  be  carried  in  a 
separate  ledger  or  record  book,  and  their  total  carried  in 
the  general  ledger  in  a  controlling  account. 

In  case  of  sale  or  other  disposition  of  any  of  them, 
the  account  under  which  it  had  formerly  been  debited 
should  be  credited  at  cost,  the  credit  entry  being  written 
on  the  same  line  as  the  debit  entry,  thus  annulling  that 
debit  item.  The  difference  between  the  total  of  debit  and 
credit  entries  is  the  cost  of  the  items  remaining. 

Depreciation.  In  view  of  the  wear  and  tear  incident 
to  permanent  property,  the  value  of  such  property  is 
constantly  undergoing  depreciation,  that  is,  reduction  in 
value  by  use.  This  depreciation  is  easily  computed  from 
a  knowledge  of  the  ordinary  term  of  usefulness  of  the 
kind  of  property  considered.  In  order  that  depreciation 
may  not  impair  the  capital  of  the  business,  the  correct 


ASSET  ACCOUNTS  35 

practice  is  to  charge  as  an  expense,  at  the  close  of  each 
accounting  period,  an  amount  equal  to  the  loss  through 
depreciation ;  that  is,  to  enter  depreciation  as  an  expense 
belonging  in  the  accounting  period  in  which  the  deprecia- 
tion occurs.  The  account  credited  in  the  ledger  for  the 
amount  thus  charged  is  entitled  General  Reserve  for 
Depreciation  if  one  reserve  is  kept  for  depreciation  on 
all  accounts.  It  is  frequently  advisable  to  open  a  sep- 
arate reserve  account  for  each  fixed  asset  account:  thus. 
Reserve  for  Depreciation  on  Office  Furniture,  Reserve 
for  Depreciation  on  Delivery  Equipment,  etc. 

The  Reserve  account  serves  as  a  credit  offset  against 
the  debit  in  the  Property  account.  Thus,  the  account  of 
a  building  may  show  (debit  side)  the  cost  to  be  $10,000. 
Assuming  that  three  per  cent  per  year  is  allowed  for  de- 
preciation, the  amount  $300,  would  be  credited  to  the 
"Reserve  for  Depreciation  on  Building"  account  and 
debited  in  an  Expense  account,  as  is  explained  later 
when  nominal  accounts  are  discussed.  This  credit  in  the 
Reserve  account  would  act  as  an  offset,  showing  that  the 
building  is  carried  on  the  books  at  cost  $10,000  less  $300 
depreciation. 

If  a  Reserve  account  is  carried  for  each  invested  as- 
set account,  it  may  very  well  be  placed  next  to  the  ac- 
count of  the  property  to  which  it  refers,  conveniently 
showing,  by  a  comparison  of  the  cost  with  the  reserve, 
the  net  amount  at  which  the  property  is  carried  on  the 
books. 

Appreciation.  The  ground  on  which  a  building 
stands,  or  any  ground  or  other  property,  may  increase 
in  value,  and  frequently  does.  But  accountants,  as  a 
rule,  do  not  recommend  that  any  account  of  appreciation 
be  kept  in  the  books.  It  is  true  that  a  lot  costing  $1000 
may  possibly  have  risen  in  value  so  as  to  be  salable  at 
$10,000.  This  would  clearly  strengthen  the  position  of 
the  concern  to  the  extent  of  $9,000.  But  to  place  the  ap- 
preciation on  the  books  as  an  added  asset  of  $9,000  would 
simply  be  making  a  record  of  an  estimate.  Accountants 
generally  regard  entry  of  appreciation  on  the  books  as 


36  PRINCIPLES 

being  subject  to  so  many  chances  of  bad  judgment  as  to 
make  entire  exclusion  the  rule. 

It  is  better  to  consider  accounts  of  permanent  prop- 
erty as  showing  how  much  capital  has  been  invested  in 
immobile  things,  not  as  showing  how  much  those  things 
may  bring  if  sold.  Asset  accounts  do  not  show  what 
property  may  be,  could  be,  might  be,  or  even  what  it 
probably  is  worth,  but  what  it  was  decided  to  be  worth 
by  both  buyer  and  seller  when  it  was  bought. 

Income  from  Property.  Property  used  in  the  ordi- 
nary operations  of  the  business  produces  no  income;  or 
rather,  the  income  from  it  consists  in  its  use.  The  ex- 
penses of  such  property,  repairs,  replacements,  etc.,  are 
expenses  of  the  business  as  a  whole.  But  property  owned 
for  income,  as  a  house  to  be  rented,  should  be  accom- 
panied by  a  special  Income  account,  showing,  as  a  credit, 
the  income  from  that  specific  source.  The  expenses  per- 
taining to  that  particular  piece  of  property  should  be 
debited  in  the  same  Income  account,  resulting  in  a  bal- 
ance showing  the  net  income  from  that  source  as  ex- 
plained in  the  chapter  on  nominal  accounts.     Such  an 

account  may  be  headed  " Income  and  Expense  of ," 

or  simply  "Income  from  ."  In  any  case,  the  ex- 
pense of  the  property  is  entered  against  the  incomes  from 
that  property. 

Speculative  Investments,  including  property  bought 
and  held  for  a  possible  rise  in  the  market,  are  not  consid- 
ered in  this  number,  but  are  discussed  in  Prin.  27. 

24  A.  The  Real  Estate  Account  is  debited  to  show 
the  cost  of  the  land,  buildings,  or  both,  as  represented 
by  the  heading ;  is  credited  to  show  the  cost  of  the  prop- 
erty sold  or  otherwise  gone  out  of  possession. 

The  cost  of  the  property  includes  expenses  of  secur- 
ing title  and  preparing  for  occupancy,  for  the  cost  of  any 
additions  to  buildings  or  permanent  improvements;  but 
not  for  expenses  in  repairing  or  replacing  damages. 
When  credited  at  cost,  the  difference  between  cost  and 
selling  price  is  credited  or  charged,  as  the  case  may  fae, 
to  Profit  and  Loss  account ;  or  if  Profit  and  Loss  account 


ASSET  ACCOUNTS  37 

is  reserved   for  the   operating   profits   only,   to    Surplus 
account. 

Remark. — The  ordinary  expenses  for  repairs  and  upkeep 
and  the  income  derived  from  the  rent  of  the  property  are  entered 
to  an  Income  and  Expense  account,  of  the  property. 

Division  of  the  account  is  desirable  so  far  as  may  be 
necessary  to  separate  pieces  or  parts  that  are  distinct 
one  from  another.  There  should  be  a  separate  account 
of  each  separate  property,  and  an  account  heading 
should  be  used  describing  it;  thus,  " Building  and  Lot 
No.  58-60  Market  St.,"  "Lot  7,  Blk  2,  McGrew's  1st  Ad- 
dition to  Chicago,"  "Farm  Property  S.  E.  %  N.  "W.  %, 
S.  5,  Twp.  27,  R.  5  W.,  6  P.  M.,"  etc. 

These  titles  are  long  and  cumbersome  for  ordinary 
posting  entry,  although  useful  in  the  ledger.  They  can 
easily  be  abbreviated  in  the  books  of  original  entry. 

Land  and  buildings  are,  as  a  rule,  better  carried  in 
separate  accounts.  A  depreciation  on  buildings  is  abso- 
lutely certain.  The  buildings  must  be  replaced  in  course 
of  time,  and  by  accumulating  a  reserve  for  this  purpose, 
year  by  year,  a  part  of  the  business  earnings  will  be  held 
to  replace  the  buildings  or  equalize  their  loss. 

The  land  itself  cannot  be  said  to  depreciate  or  ap- 
preciate in  any  fixed  or  certain  way,  so  that  its  value 
should  not  be  included  with  the  building  cost  as  a  base 
on  which  to  compute  depreciation. 

A  controlling  account,  headed  "Real  Estate"  may 
be  used  to  show  the  aggregate  amount  of  the  accounts  of 
several  properties  kept  in  a  separate  ledger  or  record 
book. 

24  B.  Furniture  and  Fixtures  account  is  debited  to 
show  the  cost  of  office  and  store  appliances  such  as  desks, 
chairs,  counters,  lighting  fixtures,  etc.,  used  in  the  busi- 
ness; is  credited  to  show  the  cost  of  any  of  these  items 
sold  or  disposed  of. 

If  the  items  are  numerous  they  may  be  kept  in  a 
subsidiary  record  and  a  controlling  account  carried  in 
the  general  ledger. 

The  account  may  be  divided  among  different  depart- 
ments of  the  same  business. 


38  PRINCIPLES     ■ 

.  Depreciation  is  carried  in  a  reserve  account  as  ex- 
plained in  Prin.  24. 

24  C.  Machinery  Account  is  debited  to  show  the 
cost  of  machinery  purchased;  credited,  to  show  the  cost 
of  machinery  sold  or  disposed  of.  It  is  better  to  distin- 
guish machinery  in  a  factory  from  equipment  and  from 
tools. 

Depreciation  in  the  value  of  machinery  is  an  impor- 
tant item  of  expense  wherever  machinery  is  used ;  for  all 
machinery  in  course  of  time  wears  out,  or  becomes  use- 
less as  compared  with  newer  styles  that  replace  the  old. 
This  loss  in  value  of  the  machinery,  as  in  the  case  of  any 
other  depreciation,  should  be  charged  among  the  ex- 
penses of  the  accounting  period  in  which  it  occurs,  and 
credited  in  a  Eeserve  for  Depreciation  account.  How 
much  to  carry  to  the  reserve  annually  depends  on  the  life 
of  the  machine,  which  may  be  five,  ten,  or  fifty  years, 
more  or  less,  depending  on  the  kind  of  machine  and  how 
it  is  used. 

Accountants  recommend  keeping  a  subsidiary  record 
of  each  machine,  showing  its  cost  and  term  of  usefulness. 
Other  entries,  such  as  cost  of  repairs  and  replacements, 
add  to  its  value  as  a  record. 

24  D.  Tools  Account  is  charged  to  show  the  cost  of 
small  tools  when  bought;  credited,  to  show  the  proceeds 
of  any  tools  sold. 

Tools  are  comparatively  small  articles  which  it  is 
difficult  to  keep  record  of  individually  in  the  ledger,  more 
especially  as  they  are  frequently  lost  or  used  up  and  re- 
placed. For  this  reason,  accountants  recommend  that  an 
inventory  of  tools  be  taken  regularly  and  that  the  tools 
be  revalued  at  statement  time.  In  that  case,  the  total  of 
the  inventory  taken  when  the  books  are  closed  takes  the 
place  of  the  balance  previously  standing  in  the  Tools 
account. 

An  account  of  reserve  for  depreciation  on  tools  is  not 
necessary  because  tools,  considered  separately  as  a  part 
of  the  assets,  are  not  sufficiently  fixed  to  continue  in  the 


ASSET  ACCOUNTS  39 

statement  for  a  period  of  years.  Where  the  tools  are  not 
revalued  at  statement  time,  and  there  is  a  purpose  to 
make  a  record  of  an  estimated  depreciation  or  diminish- 
ment  in  the  value  of  tools,  the  amount  of  depreciation 
would  better  be  credited  directly  to  the  Tools  account, 
instead  of  being  credited  in  a  Reserve  account. 

The  Controlling  Account  of  Tools  may  be  explained 
by  a  tools  ledger  or  tools  record. 

24  E.  Equipment  Account  is  debited  to  show  the 
cost  of  the  appliances  used  for  some  general  or  specified 
purpose  in  business;  is  credited  at  cost  when  sold  to  an- 
nul the  debit  for  the  items  sold. 

The  heading,  Equipment,  is  in  common  use  as  a  desig- 
nation for  the  entire  outfit  of  appliances  used  in  a  busi- 
ness, as  a  carpenter's  or  contractor's  equipment;  or  it  is 
divided,  as  Delivery  Equipment  of  a  store,  Heating 
Equipment,  etc. 

In  factory,  accounting  a  distinction  is  commonly 
made  between  three  classes  of  appliances  as  distin- 
guished by  the  following  headings :  Machinery,  Tools,  and 
Equipment;  the  last  named  referring  to  appliances  in 
general  use,  as  shafts,  belts,  pulleys,  trucks,  etc. 

If  carried  as  a  controlling  account,  a  list  of  the  items 
should  be  kept  in  a  subsidiary  ledger  or  record  book, 
otherwise  the  items  should  be  listed  in  the  ledger  account. 

Equipment  of  all  kinds  wears  out  or  is  obsolescent 
with  time,  so  that  the  profits  of  a  business  will  be  over- 
rated unless  the  loss  of  a  given  period,  through  deprecia- 
tion, is  deducted  from  the  income  of  that  period.  This 
charge  to  income  should  be  credited  in  a  Reserve  ac- 
count unless  the  equipment  is  of  such  a  nature  as  to  re- 
quire a  revaluation,  from  period  to  period,  by  inventory. 
The  reserve  serves  as  an  offset  reducing  the  amount  at 
which  the  equipment  is  carried  on  the  books;  or  if  the 
equipment  is  revalued,  the  latest  inventory  replaces  the 
former  total  charge  in  the  account. 

25.     Accounts  of  Invested  Funds  are  debited  to  show 


40  PRINCIPLES 

the    amounts    placed    in    the    fund;    credited,    to    show 
amounts  applied  or  withdrawn  from  the  fund. 

A  permanent  "fund  indicates  something  set  aside  from 
the  general  business  expenditures,  and  saved  to  meet  a 
future  obligation.  This  money  set  aside  is,  as  a  rule, 
made  productive  by  investing  it  in  stocks,  bonds,  mort- 
gages or  other  securities  which  will  yield  a  fair  rate  of 
income  to  be  added  to  the  fund. 

25  A.  Sinking  Fund.  As  an  instance  illustrating 
the  purpose  of  a  sinking  fund,  assume  that  the  owners 
of  a  coal  mine  borrow  money  to  develop  the  property, 
giving  a  ten-year  bond  and  mortgage.  Inasmuch  as  the 
coal  mine  may  be  worked  entirely  out  within  ten  years 
and  be  worth  nothing  from  which  collection  of  the  mort- 
gage could  be  realized,  the  lenders  may  make  it  a  con- 
dition of  the  loan  that  a  certain  amount  of  the  annual 
earnings  of  the  property  be  set  aside  in  a  fund  until  the 
fund  be  sufficient  to  pay  the  indebtedness.  This  Jund  is 
held  by  a  trustee,  who- sees  that  the  conditions  are  com- 
plied with  and  who  invests  the  fund  so  that  it  may  be  in- 
creased by  the  income  earned  thereby.  When  the  indebt- 
edness of  the  concern  matures,  it  is  paid  out  of  the  fund, 
and,  of  course,  any  remainder  is  turned  back  to  the 
owners. 

The  payment  of  city,  county,  state  and  public  bonds 
is  commonly  provided  for  by  means  of  sinking  funds  into 
which  certain  amounts  are  set  aside  annually  from  the 
tax  collections. 

25  C.  Mortgage  Loans  are  long-time  (from  one  year 
to  ten  or  more  years)  obligations,  and  draw  a  stated  rate 
of  interest  payable  annually,  semi-annually  (every  six 
months),  or  quarterly  (every  three  months). 

A  ledger  asset  account  under  the  title,  Mortgage 
Loans  Receivable,  may  be  kept.  This  is  in  the  same  form 
as  the  account  of  Notes  Receivable  (see  Form  11  C).  The 
account  is  debited  for  the  face  of  the  loans,  and  credited 
for  the  payment  of  principal.  The  interest  receipts  col- 
lected from  them  are  credited  to  Interest  account,  which 


ASSET  ACCOUNTS  41 

is  kept  in  the  part  of  the  ledger  reserved  for  nominal 
accounts. 

Loan  securities  are  often  purchased  for  an  amount 
equal  to  both  principal  and  accrued  interest.  In  that  case 
the  interest  accrued  should  be  charged  to  Interest  ac- 
count, not  to  Mortgage  Loans,  so  that  the  charge  to  the 
latter  account  will  be  the  face  of  the  paper.  When  paid, 
a  credit  is  made  directly  opposite,  on  the  same  line,  to  the 
charge  for  the  given  payment. 

Loan  records  may  be  kept  in  a  separate  subsidiary 
ledger  or  record,  of  which  a  controlling  account  in  the 
general  ledger  will  give  the  aggregates ;  or  they  may  be 
recorded  in  an  auxiliary  book.  This  subsidiary  book  con- 
tains ruled  columns  for  description  of  each  item,  like  the 
notes  receivable  book. 

25  D.  Bonds  for  the  repayment  of  loans  are  issued 
by  the  nation,  state,  city,  county,  township,  school  dis- 
trict, or  other  public  corporations;  by  transportation, 
trading,  manufacturing,  or  service  corporations ;  by  firms 
and  by  private  persons,  as  evidence  of  their  promise  to 
pay,  at  a  future  time,  a  sum  of  money  with  annual,  semi- 
annual or  quarterly  payments  of  interest  thereon.  Bonds 
are  frequently  secured  by  mortgage  on  property.  Bonds 
are  bought  by  the  investor  at  par,  at  a  premium,  or  at  a 
discount.  When  bought,  an  account  headed  Bonds  may 
be  debited  to  show  the  face  of  different  kinds  as  anno- 
tated in  the  explanatory  space  of  the  account;  or,  a  sep- 
arate account  may  be  kept  for  each  kind.  When  sold,  the 
account  is  credited  at  face,  and  the  difference  is  carried 
to  Profit  and  Loss. 

25  E.  Stocks  Account  is  charged  at  cost,  for  the  pur- 
chase of  stocks  by  the  concern.  Each  purchase  is  given 
a  line  in  which  is  entered,  in  the  explanatory  column,  the 
date,  name  and  the  par  amount  of  the  share,  or  block  of 
shares ;  and  the  cost  in  the  money  column. 

Brokers  who  handle  stocks  freely,  open  separate 
ledger  accounts  for  each  kind  of  stock.  In  that  case,  the 
name  of  the  issuing  company  appears  as  the  heading : 
thus,  D.  &  R.  G.  Ry.  Stock. 


42  PRINCIPLES 

When  stock  is  sold,  an  entry  is  placed  to  the  credit 
of  the  account  on  the  same  line  as  the  debit  for  the  same 
shares,  and  at  the  same  price.  As  it  often  happens  that 
the  stocks  are  sold  for  either  more  or  less  than  their  pur- 
chase price,  the  difference,  if  the  selling  price  is  less  than 
the  cost,  is  debited,  or  if  greater,  is  credited,  to  Profit 
and  Loss. 

26.  Wasting  Asset  Accounts  are  debited  to  show 
the  cost  of  the  property;  credited,  period  by  period,  to 
show  the  amounts  of  depletion  from  the  original  value. 
Such  accounts  are  distinguished  from  other  fixed  prop- 
erty in  that  they  represent  something  that  is  being  ab- 
sorbed gradually;  as  a  coal  mine,  a  tract  of  timberland, 
a  stone  quarry,  and  the  like.  A  part  of  the  asset  value 
is  being  withdrawn  day  by  day  in  the  regular  course  of 
business.  The  property  is  not  to  be  replaced,  but  is  to  be 
absorbed  more  or  less  depending  on  the  value  for  other 
purposes  after  it  is  worked  out.  A  Reserve  account  for 
depletion  would  be  out  of  place.  The  amount  written 
off  each  year  is  to  be  credited  directly  in  the  account.  It 
should  be  "written  down''  so  as  to  appear  at  a  safe  valua- 
tion as  an  asset. 

There  is  often  special  reason  for  considering  de- 
pletion with  care.  A  manufacturer  who  uses  timber, 
sand,  clay,  etc.,  taken  from  his  own  property,  must  in- 
clude depletion  as  a  part  of  the  cost  of  his  product. 

27.  Speculative  Asset  Accounts  are  debited  for  the 
cost  of  the  property  bought  (or  the  appraised  value  of 
gifts),  also,  for  expenses  attached  to  the  speculation;  and 
are  credited  for  incidental  incomes  derived  therefrom. 
When  the  speculation  is  closed  out  by  sale,  the  account 
is  credited  for  an  amount  equal  to  the  debit  balance ;  and 
the  difference  between  the  debit  balance  of  the  account 
and  the  amount  realized  from  the  sale,  is  posted  to  Profit 
and  Loss. 

Speculation  is  business  venture  that  involves  un- 
usual risk  for  the  purpose  of  realizing  unusual  gain. 
Thus,  a  piece  of  land  may  be  bought  for  a  certain  sum 
in  the  hope  that  a  customer  will  be  found  who  will  buy 


ASSET  ACCOUNTS  43 

it  for  a  greater  sum  than  that  paid  for  it.  Such  specula- 
tion differs  from  business  investment.  In  the  latter, 
property  is  bought  for  use  or  for  trading,  that  is,  dis- 
tributing goods  to  consumers  by  purchase  and  sale 
primarily  without  reference  to  market  fluctuations. 
Speculation  may  consist  in  buying  commodities  for  ship- 
ment and  sale  in  a  distant  market;  development  of  pat- 
ents or  copyrights,  or  securing  property  or  claims  of  any 
kind  with  a  view  to  realizing  more  than  their  present 
current  value.  It  may  also  consist  in  buying  the  obliga- 
tion of  another  concern  to  deliver  a  commodity  at  a  future 
date,  as  is  frequently  the  case  in  board  of  trade  transac- 
tions. 

Property  taken  for  debt  is  similarly  treated,  as  when 
a  bank  or  lender  takes  over  property  given  for  security. 
Likewise,  when  an  educational  or  eleemosynary  institu- 
tion receives  property  as  a  gift  to  be  disposed  of  for  its 
benefit,  the  account  of  the  property  so  treated  would  be 
that  of  a  speculative  account. 

Any  account  of  a  speculation  is  headed  with  a  de- 
scriptive title,  as:  Shipment  to  Central  Commission  Co., 
Speculation  in  Oregon  Timber,  Publication  of  Base  Ball 
Score  Cards,  Futures  in  May  Wheat,  Salvage  of  Jackson 
Elevator,  Maywood  Addition. 

28.  Intangible  Asset  Accounts  are  debited  to  show 
their  valuation  on  the  books  at  cost;  credited,  to  show 
diminishment  in  value  through  lapse  of  time,  or  other 
reasons.  The  purpose  is  to  write  them  down  periodically 
until  their  book  value  entirely  disappears. 

Such  accounts  represent  the  valuation  placed  on  some 
right,  privilege,  condition,  or  circumstance  that  cannot 
be  bought  and  sold  as  ordinary  Teal  or  personal  property, 
but  that  is  plainly  a  factor  in  the  profitable  operation  of 
the  business.    The  value  expires  with  time. 

Such  accounts  should  be  debited  for  the  actual  cost 
(not  an  estimated  value),  and  ordinarily  should  be  re- 
duced by  credit  at  the  close  of  succeeding  accounting 
periods  for  an  estimated  diminishment  in  value,  if  such 


41  PRINCIPLES 

is  plainly  apparent,  or  arbitrarily  reduced  with  a  view  to 
final  extinguishment. 

28  A.  Patent  Rights  Account  should  be  debited  at 
the  price  paid  to  a  patentee  for  a  right  to  manufacture 
and  sell  his  patented  article.  Such  patents  expire  by  time 
limitation.  The  account  should  be  credited  from  time  to 
time  for  an  amount  sufficient  to  equalize  the  diminishing 
value  of  the  patent.  The  account  heading  should  de- 
scribe the  particular  patent. 

28  B.  Copyrights  Account  is  debited  for  the  cost  of 
matter  for  publication  which  is  protected  by  registry 
under  the  copyright  laws  of  the  United  States  or  other 
nations.  The  account  is  treated  in  the  same  way  as  patent 
rights. 

28  0.  Franchise  Account  is  similarly  debited  for  the 
cost  of  a  franchise  conveyed  to  the  business.  A  franchise 
is  granted  for  a  term  of  years  so  that  this  cost  should  be 
extinguished  during  the  period  it  is  in  effect,  and  there- 
fore represents  a  diminishing  asset  that  should  be  equal- 
ized by  charging  Profit  and  Loss  and  crediting  the  Fran- 
chise account  each  year  with  the  amount  of  the  expired 
portion. 

28  D.  Accounts  of  Deferred  Expense  Items  are  deb- 
ited to  show  amounts  paid  or  incurred  for  items  that  will 
be  chargeable  to  expense  at  a  later  time,  but  before  that 
time  are  carried  as  assets;  credited,  to  show  a  portion  or 
all  of  the  deferred  items  written  off  as  expenses. 

Expense  accounts  should  show  what  amount  of  ex- 
penses were  consumed  in  a  given  period  of  time,  regard- 
less of  when  the  expenses  happened  to  be  paid.  Hence, 
expense  items,  sometimes  paid  in  one  period,  that  should 
be  charged  as  expense  in  a  later  period,  are  carried  over 
as  assets.  Thus,  a  certain  sum  paid  for  advertising 
material  to  be  used  in  the  year  following  its  charge,  might 
be  carried  as  an  asset  on  the  books  until  the  time  when  it 
should  appear  among  the  expenses;  at  which  time  the 
credit  in  the  Asset  account,  and  the  corresponding  debit 
in  the  Expense  account,  is  made.    Where  the  proportions 


ASSET  ACCOUNTS  4", 

existing  between  sales  or  production  and  expenses  are 
computed  closely,  care  must  be  taken  to  limit  the  expense 
charges  to  things  actually  consumed  in  a  given  period.  A 
few  examples  following  will  illustrate  the  principle  and 
enable  one  to  identify  other  instances  of  like  nature. 

28  E.  Insurance  Account  is  debited,  ordinarily  as  a 
deferred  item,  for  the  annual  cost  of  premiums  on  insur- 
ance policies.  At  the  close  of  regular  periods,  sometimes 
monthly,  sometimes  annually,  the  account  should  be  cred- 
ited for  the  consumed  portion  and  the  Expense  account 
of  the  business,  or  of  the  department  to  which  it  belongs, 
debited. 

28  F.  Taxes,  usually  paid  annually  or  in  semi-annual 
installments,  may  be  debited  as  a  deferred  item,  while 
one-twelfth  of  the  annual  cost  is  credited  monthly  and  a 
corresponding  debit  made  to  the  expenses  of  the  month. 

28  G.  Organization  Expenses  of  a  corporation  some- 
times are  in  excess  of,  or  at  any  rate  out  of  proportion  to 
the  income  of  the  first  year ;  so  instead  of  charging  them 
as  expense  in  total  during  the  first  year,  they  are  carried 
in  an  Asset  account  to  be  transferred  to  expense,  part  at 
a  time,  during  succeeding  periods. 

29.  Contingent  Assets  are  those  that  may  or  may  not 
be  realized  in  cash,  depending  on  some  unforeseen  circum- 
stance. Among  them  are  accounts,  notes,  judgments,  and 
disputed  adjustments  that  might  be  collected.  Accounts 
of  this  nature  are  very  well  kept  in  a  memorandum 
ledger.  It  is  well  understood  that  these  accounts  are  not 
worth  face  value,  in  fact  it  is  presumed  that  few  of  them 
will  be  collected;  but,  included  in  this  list  are  all  that 
might  be  collected.  This  record  of  contingent  assets  may 
have  a  controlling  account  in  the  ledger,  kept  more  as  a 
notice  of  the  existence  of  the  list  than  anything  else.  As 
a  reminder  that  such  a  list  is  to  be  found,  a  nominal  value 
of  one  dollar  may  be  charged  to  a  controlling  account  in 
the  general  ledger. 

30.  The  Good-will  Account  is  debited  to  show  the 
valuation  placed  upon  the  reputation,  standing  or  trade 


46  PRINCIPLES 

advantages  of  a  business,  and  included  as  a  part  of  the 
assets  when  the  business  changes  hands ;  credited,  at  regu- 
lar periods  out  of  profits  earned,  with  a  view  to  finally 
writing  it  off  the  books. 

The  opening  of  a  Good-will  account  may  be  illustrated  thus : 
Firm  B  buys  Firm  A's  business  which  shows  the  net  worth,  by  a 
statement  of  property  and  debts,  to  be  $40,000,  but  pays  for  it 
$50,000.  The  $10,000  paid  in  addition  to  the  listed  net  assets,  is 
the  value  placed  upon  the  trade  advantages  developed  by  Firm  A. 
The  new  firm  will  open  an  account  headed  Good-will,  debiting 
the  amount  allowed  in  that  account.  It  seems  clear  that  the  good- 
will developed  and  sold  by  Firm  A  will  begin  to  diminish  as  soon 
as  the  business  is  operated  by  Firm  B,  so  that  after  a  given  num- 
ber of  years,  the  thing  bought  would  have  been  entirely  ex- 
haused,  even  though  the  Firm  B  continues  the  business  profitably 
and  could  sell  it  to  another  firm  at  an  equally  good  or  even  better 
estimated  good-will ;  so  that  the  amount  standing  in  the  Good-will 
account  does  not  seem  to  represent  any  subsequently  favorable 
or  unfavorable  development  in  the  business,  and,  as  a  consequence, 
is  entitled  to  no  permanent  place  in  the  books. 


CHAPTER  V 

LIABILITY  ACCOUNTS 

31.  The  Accounts  of  Liabilities  show  the  amounts 
that  the  proprietor  is  under  obligation  to  pay  to  persons 
outside  the  business.  The  funds  to  pay  liabilities  are 
taken  from  the  assets.  Asset  amounts  are  found  as  debit 
balances,  while  liability  amounts  are  credit  balances. 

Under  liabilities  are  included  accounts  payable,  notes 
payable,  liability  inventory  of  otherwise  unrecorded  pay- 
ables, long-term  obligations  including  mortgages,  bonds 
and  loans  payable,  and  contingent  liabilities. 

They  are  classified  as  current  liabilities  (within  the 
year),  long-term  liabilities  (one  year  or  more),  or  con- 
tingent liabilities. 

32.  Current  Liabilities:  Accounts  Payable  are  cred- 
ited to  show  the  amounts  the  firm  has  assumed  to  pay 
others;  debited,  to  show  reductions  in  the  amounts  pay- 
able. 

When  accounts  payable  are  opened  for  goods  bought 
at  retail,  or  for  services  as  of  transfer  concerns,  doctors, 
mechanics,  etc.,  it  is  customary,  unless  otherwise  specified, 
to  settle  about  the  first  of  every  month  for  the  amounts 
credited  during  the  preceding  month. 

"When  keeping  an  account  payable  for  goods  bought 
at  wholesale,  it  is  usually  better,  and  often  necessary,  to 
pay  each  credit  separately.  This  is  done  because  whole- 
salers usually  allow  a  specified  term  of  credit,  running 
from  the  date  of  the  bill.  Thus,  an  invoice  of  goods 
bought  June  19th,  on  account  at  30  days,  should  be  paid 
by  July  19.  Such  terms  of  credit  as  30,  60,  or  90  days, 
or  2,  3,  or  6  months,  are  allowed.  The  difference  in  time 
varies  in  different  lines  of  trade. 

Such  accounts  should  show  the  credits  entered  when 
the  invoices  are  allowed,  and  in  the  explanatory  space 
of  the  ledger,   date  of  invoice,   and  the  term  of  credit 


48  PRINCIPLES 

should  be  entered,  if  any  special  term  is  granted.  (See 
Form  13  H.)  The  payment  of  a  specified  credit  should 
be  debited  on  the  same  writing  line  as  the  credit,  thus 
showing  what  charge  is  canceled.  It  is  a  good  plan  to 
use  a  sign  "x"  before  the  credit  amounts  that  have  been 
paid,  as  a  convenience  in  easily  picking  out  the  unpaid 
credits  later.     (See  Form  13  I.) 

"When  a  deduction  or  allowance  is  made  from  an 
invoice  of  goods  bought,  it  is  a  good  plan  to  debit  the 
allowance  opposite  the .  credit  to  which  it  applies  above 
the  writing  line,  so  that  full  settlement  of  the  credit  may 
be  charged  on  the  writing  line.     (See  Form  12' D.) 

A  controlling  account  headed  Accounts  Payable  rep- 
resents the  aggregate  of  all  unpaid  accounts  in  favor  of 
other  persons  or  firms.  Sometimes  the  titles  Purchase 
Ledger  or  Trade  Creditors  are  used,  meaning  the  same 
thing.  When  the  voucher  system  is  in  operation,  the  title 
Vouchers  Payable  bears  the  same  relation.  The  account 
is  credited  at  the  close  of  the  month,  or  other  posting 
period,  for  the  total  credits  to  firms  for  merchandise 
bought ;  and  charged  for  the  total  debits  to  firms  for  pay- 
ments or  allowances.  The  balance  shown  by  the  control- 
ling account  can  be  verified  by  a  comparison  with  the 
total  of  a  list  of  unpaid  balances  taken  from  the  pur- 
chases ledger  or,  if  a  voucher  system  is  used,  from  a  list 
of  the  vouchers  payable. 

32  E.  Notes  Payable  Account  is  credited  to  show 
amounts  of  notes  or  accepted  time  drafts  issued  for  pay- 
ment later;  is  debited  to  show  payment  made,  or  other 
allowance  reducing  the  amount  to  be  paid. 

Notes  given  by  the  concern  are  recorded  in  similar 
manner  to  notes  receivable  under  similar  conditions.  (See 
Prin.  23  D.) 

32  F.  Liability  Inventory  Account.  At  the  close  of 
an  accounting  period,  certain  liabilities  that  have  not  been 
recorded,  may  be  taken  into  account.  Among  these,  are 
accrued  interest  on  notes  or  accounts  payable,  wages  and 
salaries  earned  but  not  yet  paid,  and  other  payments  to 
be  made  for  unrecorded  benefits  already  received.    These 


LIABILITY  ACCOUNTS  49 

should  be  listed  in  the  inventory  book  and  their  total 
credited  to  the  account  of  Liability  Inventory.  A  corre- 
sponding debit  is  then  made  .in  the  nominal  accounts  to 
which  they  pertain.  At  the  close  of  the  following  period, 
the  Inventory  account  is  debited  and  the  nominal  ac- 
counts involved  are  credited,  thus  balancing  out  the  old 
inventory.  The  new,  or  current,  inventory  is  then  entered 
as  before. 

33.  Long-Term  Indebtedness.  Bonds,  loans  and 
long-term  notes  payable  are  credited  in  the  books  to 
show  the  total  obligation  under  the  appropriate  headings ; 
debited,  to  show  the  obligation  canceled  in  part  or  wholly. 

The  long-term  obligations  require  full  records  as  to 
terms  of  payment,  also  rate  of  interest,  and  other  essen- 
tials. 

Where  few  such  obligations  are  issued,  an  ordinary 
ledger  page  may  be  made  to  contain  the  records;  but 
where  there  are  a  series  of  such  obligations,  a  separate 
record  book  is  needed. 

As  mentioned  in  Prin.  25  A,  a  sinking  fund  is  com- 
monly accumulated  in  order  to  provide  for  long-term  ob- 
ligations in  full,  or  to  retire  bonds  or  notes  payable  part 
at  a  time. 

34.  Contingent  Liabilities  are  obligations  that  may 
become  current,  should  another  person,  who  is  the  prin- 
cipal debtor,  fail  to  pay  them.  They  consist  principally 
of  notes  receivable  discounted  and  accommodation  paper. 
Should  the  principal  debtor  fail  to  pay  them,  they  become 
serious  matters  and  therefore  should  be  followed  up 
closely. 

34  A.  Notes  Receivable  Discounted  Account  should 
be  credited  for  the  face  of  all  notes  receivable  which  have 
been  endorsed  over  to  the  bank  or  to  individuals  for  cash 
or  credit.  The  items  should  be  entered  and  described 
as  in  the  Notes  Payable  account.  The  corresponding 
charges  are  to  Cash  and  to  Interest  and  Discount.  When 
the  notes  are  paid  by  the  makers  to  the  holders,  entries 
are  to  be  made  debiting  Notes  Receivable  Discounted  ac- 
count and  crediting  Notes  Receivable  account. 


50  PRINCIPLES 

If  the  endorsee  fails  to  collect,  the  endorser  is 
obliged  to  pay  the  amount  of  the  paper.  In  that  case  he 
charges  Notes  Receivable  Discounted  for  the  notes  re- 
turned to  him,  the  Notes  Receivable  account  standing 
without  any  change. 

34  B.  Accommodation  Paper  Account  is  credited  for 
the  face  of  the  paper  signed  for  the  accommodated  party. 
Each  item  should  be  entered  with  the  same  attention  that 
is  given  to  a  note  payable.  The  corresponding  charge 
is  to  the  party  accommodated,  thus,  "John  Smith,  Ac- 
commodation." When  the  obligation  is  met  by  the  prin- 
cipal debtor,  an  entry  is  made  charging  Accommodation 
Paper,  and  crediting  the  party  who  was  charged  for  the 
accommodation. 

35.  Reserve  Accounts  are  credited  to  indicate  an  ad- 
dition to  the  book  value  of  the  assets.  Such  additions  are 
made  to  anticipate  losses  in  the  accounts  named  in  the 
reserve.  The  Reserve  account  is  debited  with  the  amounts 
of  such  losses  when  they  actually  occur. 

The  effect  of  a  reserve  is  to  withhold  a  certain  part 
of  the  apparent  profits  from  distribution. 

The  ^accounts  of  assets  and  liabilities,  taken  as  a 
whole  at  the  amounts  entered  as  the  result  of  transac- 
tions, may  overstate  the  real  net  worth  of  the  concern. 
This  overstatement  may  occur  in  several  accounts.  For 
example,  an  account  of  fixed  property  may  show  the  cost 
to  be  $10,000 ;  but  would  not  show  that  it  had  depreciated 
to  the  extent  of  $1000.  Or,  an  account  of  notes  receiv- 
able may  show  that  the  concern  has  received  notes  to  the 
amount  of  $25,000,  but  would  not  show,  what  might  be 
the  case,  that  $500  face  value  of  those  notes  will  be  found 
to  be  uncollectible,  and  will  result  in  a  loss. 

Before  allowing  all  apparent  profits  to  be  with- 
drawn, the  prudent  directors  of  a  concern  may  find  it 
advisable  to  keep  or  reserve  some  of  the  profits,  either  as 
an  offset  against  diminishing  capital,  through  deprecia- 
tion in  value  of  property  owned,  or  as  an  offset  against 
bad  debts,  or  as  an  addition  to  the  general  resources  of 


LIABILITY  ACCOUNTS  51 

the  business.  %  Such  amounts  reserved  are  represented  by- 
Reserve  accounts,  which  receive  credit  for  the  amount 
retained.  The  cash  or  property  reserved  is  included  in 
the  aggregate  of  the  Asset  accounts,  and  balances  the 
credit  in  the  Reserve  account  in  the  same  way  that  the 
accounts  of  the  remainder  of  the  assets  (less  liabilities) 
balance  the  Capital  account. 

35  A.  Reserve  for  Depreciation  Account  is  credited 
to  offset  loss  sustained  through  the  diminishing  value  of 
fixed  property  through  ordinary  wear.  The  credits  to 
this  account  should  show,  in  the  explanatory  column,  the 
particular  property  account  that  each  item  pertains  to 
if  one  reserve  for  Depreciation  account  is  kept  for  all 
property.  A  separate  Reserve  account  may  be  opened 
for  each  property  account;  as,  Reserve  for  Depreciation 
(Plant),  Reserve  for  Depreciation  (Delivery  Equipment), 
etc.  These  accounts  should  show  enough  reserve  to  equal 
the  difference  between  the  cost  of  the  property  and  its 
present  market  value.  Depreciation  is  an  expense,  as 
real  as  the  payment  of  rent  or  salaries,  and  should  be 
charged  regularly  regardless  of  whether  the  business  is 
being  run  at  a  profit  or  at  a  loss. 

When  any  given  building  or  machinery  carrying  a 
reserve  for  depreciation  is  sold,  the  entry  of  the  sale 
should  contain  a  debit  in  the  Reserve  for  Depreciation 
for  an  amount  to  balance  the  credit  in  the  Reserve  ac- 
count which  applies  to  the  sold  property. 

35  B.  Reserve  for  Doubtful  Accounts.  When  an 
examination  of  the  accounts  receivable  discloses  the  fact 
that  any  of  the  accounts  are  doubtful,  or  that  losses  will 
probably  occur  in  enforcing  collection,  it  is  apparent 
that  the  total  of  the  accounts  receivable  balances  is 
greater  than  the  asset  value  of  the  accounts.  The  shrink- 
age in  value  may  be  offset  by  an  estimated  amount 
taken  from  profits  and  credited  to  an  account  of  Reserve 
for  Doubtful  Accounts.  This  reserve  should  be  revised 
annually  to  show  an  amount  equal  to  the  probable  losses 
that  will  be  incurred  through  bad  debts.    When  a  reserve 


52  PRINCIPLES 

has  been  set  up  in  one  accounting  period,  the  actual 
losses  incurred  from  accounts  becoming  worthless  in  the 
following  period  should  be  charged  to  the  Reserve  ac- 
count until  the  reserve  is  charged  off,  rather  than  to 
Profit  and  Loss. 

35  C.  General  Reserve  Account.  This  account  may 
be  used  to  contain  credits  of  reserve  for  depreciation,  for 
bad  debts,  or  to  meet  any  future  contingencies  of  the 
business;  or  it  may  be  used  to  increase  the  amount  of 
working  capital. 

The  objectionable  feature  of  carrying  reserves  be- 
yond business  needs  is,  that  such  reserves  may  be  made 
without  the  knowledge  or  consent  of  stockholders  or  in- 
terested investors,  who  would  be  entitled  to  a  larger 
share  of  profits,  if  such  profits  were  distributed  in  the 
period  when  earned. 

36.  Surplus  Account.  This  account  is  credited  to 
represent  profits  reserved  to  increase  the  financial  re- 
sources of  the  business,  or  simply  to  represent  profits 
prior  to  distribution  in  dividends.  The  report  of  the 
United  States  comptroller  of  the  currency  shows  state- 
ments from  many  banks  that  have  permanent  Surplus 
accounts  equal  to,  or  greatly  in  excess  of  the  Capital 
Stock  account.  Surplus  account  represents  earnings 
which  may  be  retained  in  the  business  as  capital,  paid 
out  in  dividends,  or  applied  on  losses. 


CHAPTER  VI 

PROPRIETORSHIP   ACCOUNTS 

37.  The  Capital  Account  of  an  Individual  Proprie- 
torship is  the  account  credited  for  the  money  and  other 
assets  invested,  or  owned  as  parts  of  the  concern  for 
which  the  books  are  kept.  The  amount  of  this  credit  is 
diminished  by  the  amount  of  any  liabilities  that  are  to  be 
paid  out  of  the  assets.  It  shows,  therefore,  the  net  worth 
of  the  concern,  though  not  necessarily  the  net  worth  of 
the  owner,  who  may  or  may  not  have  his  entire  posses- 
sions included  in  the  concern.-     - 

The  Capital  account  shows  as  a  credit  amount  the 
excess  of  total  assets  over  total  liabilities  of  a  given  con- 
cern. This  credit  is  the  amount  that  the  proprietor  could 
expect  to  have  for  other  purposes  if  the  business  in 
which  it  is  now  used  should  be  discontinued. 

37  B.  The  .incomes  of  the  business  increase  the  capi- 
tal, and  the  expenses  diminish  it.  If  they  were  credited 
or  charged  to  the  Capital  account,  as  they  occur,  the 
Capital  account  would  at  all  times  represent  the  worth 
of  the  business.  This  may  be  done,  but  the  custom  is  to 
credit  the  incomes  and  charge  the  expenses  to  certain 
nominal  accounts  which,  once  a  year  or  other  period 
(called  the  accounting  period),  are  combined  into  one 
result  and  carried  to  the  Capital  account.  Thus,  the 
Capital  account  of  an  individual  proprietorship  shows 
the  exact  capital  or  net  worth  of  a  business  only  at  the 
close  or  beginning  of  an  accounting  period,  the  nominal 
accounts  showing  the  increase  or  decrease  in  that  capi- 
tal during  the  intervening  time. 

37  C.  As  a  general  rule,  in  the  larger  concerns,  as 
well  as  in  many  of  the  smaller  ones,  the  capital  is  fixed 
at  afti  amount  not  to  be  increased  or  diminished  by  the 
profits  and  losses.  In  this  case,  the  amount  of  the  net 
profit  or  loss  of  a  given  period  is  not  carried  from  the 

53 


54  PRINCIPLES 

nominal  accounts  to  the  Capital  account,  but  is  carried 
to  the  proprietor's  Drawing  account,  an  account  that  is 
credited  for  amounts  which  he  may  draw  out  of  the  con- 
cern for  his  personal  use. 

37  D.  The  title  of  the  Capital  account  is  written  in 
various  ways;  thus,  John  Smith,  Capital;  John  Smith, 
Proprietor ;  John  Smith,  Investment ;  John  Smith,  Stock ; 
or  simply  John  Smith.  The  title  may  also  be  unpersonal, 
as  Stock,  or  Capital.  The  form  John  Smith,  Capital,  is 
preferred.  The  position  in  the  ledger  assigned  to  the 
Capital  account  varies  with  different  bookkeepers.  It 
seems  preferable  to  place  it  last  in  the  division  of  real 
accounts,  wherein  Asset  accounts  appear  first,  in  the 
order  of  their  convertibility,  followed  by  liability  ac- 
counts in  the  order  of  their  immediate  or  remote  demand 
for  payment,  followed  by  the  summary  in  the  Capital 
account. 

This  is  also  the  most  convenient  place  for  reference 
when  making  a  trial  balance  or  a  financial  statement; 
especially  since,  once  a  year,  all  the  nominal  accounts 
following  in  the  real  accounts  are  closed,  leaving  the 
ledger  intact  to  that  point. 

37  E.     Forms  of  individual  Capital  account: 

Forms  10  E  and  10  F.  The  account  is  here  credited  for  in- 
vestment and  for  incomes  and  charged  for  expenses  item  by  item. 
The  balance  of  this  account,  taken  at  any  time,  is  the  amount  of 
net  worth. 

-  Form  10  H.  The  Capital  account  remains  as  at  the  begin- 
ning of  the  accounting  period,  while  the  incomes  are  credited  in 
one  nominal  account  (Form  101)  and  the  expenses  in  another 
<Form  10  J). 

The  same  accounts,  copied  on  the  opposite  page,  show  the 
income  (Form  10 M)  and  the  Expense  (Form  ION)  carried  to 
Profit  and  Loss  (Form  IOC)  from  which  account  the  balance  is 
carried  to  the  Capital  account  (Form  10 L).  This  account,  when 
balanced,  exhibits  the  same  amount  as  did  Form  10  F  by  the 
former  process. 

If,  after  showing  the  net  profit  of  $4.75  (Form  10  O)  it  had 
been  decided  not  to  increase  the  capital,  but  to  withdraw  the 
profits,  the  balance  of  the  Profit  and  Loss  account  would  have 
been  carried  to  the  credit  of  another  account  entitled,  Charles 
Burton,  Drawing.  This  account  would  be  charged  later  for  the 
amounts  drawn  out  by  Burton  for  his  personal  expenditures. 


PROPRIETORSHIP  ACCOUNTS  55 

38.  The  Capital  Accounts,  of  a  Partnership  are  cred- 
ited for  the  investments  of  each  of  the  partners  separ- 
ately. Thus,  if  John  Smith  and  Lewis  Jones  enter  into 
partnership,  upon  opening  the  firm  books,  an  account  en- 
titled, John  Smith,  Capital,  or  John  Smith,  Partner,  will 
be  credited  for  the  capital  which  he  invests,  as  is  done 
in  the  capital  account  of  a  sole  proprietor;  an  account 
entitled,  Lewis  Jones,  Capital,  or  Lewis  Jones,  Partner, 
will  be  similarly  credited  for  the  capital  contributed  by 
the  latter.  If  there  are  several  partners,  a  like  entry 
will  be  made  crediting  the  Capital  account  of  each. 

When  the  Profit  and  Loss  account  is  made  up  at  the 
close  of  the  accounting  period,  the  net  profit  or  loss,  in  the 
absence  of  any  agreement  to  the  contrary,  is  divided 
equally  among  the  partners.  If  there  is  a  special  agree- 
ment as  to  the  proportion  each  is  entitled  to,  the  profits 
are  divided  according  to  that  agreement,  and  the  part 
belonging  to  each  partner  is  carried  to  his  Capital  ac- 
count  or   to   his   Drawing   account. 

39.  The  Capital  Account  of  a  Corporation  is  cred- 
ited for  the  amount  of  the  authorized  capital  of  the  con- 
cern. If  this  amount  is  paid  into  the  company  in  cash 
or  property  by  the  investors  when  the  concern  is  estab- 
lished, the  opening  entry  is  very  simple — the  asset 
accounts  are  deducted,  and  the  Capital  account  is  credited 
But  this  condition  rarely  exists,  for  the  reason  that  the 
entire  capital  cannot  ordinarily  be  secured  from  the 
investors  at  one  time,  but  is  frequently  collected  in  in- 
stallments. Furthermore,  subscriptions  for  the  entire 
amount  of  the  authorized  capital  stock  may  not  be  found 
at  the  time  of  organization.  Again,  the  legal  obligations 
of  each  of  the  members  to  the  company,  and  the  obliga- 
tion of  the  corporation  to  the  state,  require  special  record 
to  guide  in  their  enforcement.  Thus,  if  the  capital  is  not 
all  paid  in,  the  Capital  Stock  account  should  be  dimin- 
ished by  certain  accounts,  the  debits  of  which  show  how 
much  of  the  amount  credited  to  the  Capital  Stock  account 
exceeds  the  real  capital  of  the  business.     The  principal 


56  PRINCIPLES 

accounts  of  this  nature  are  entitled,   Subscriptions,  Un- 
subscribed Stock,  and  Treasury  Stock. 

The  net  profit  or  loss  is  not  carried  to  the  Capital 
Stock  account  of  a  corporation,  but  is  carried  to  Surplus ; 
except  where  a  deficit  results,  when  the  amount  of  the 
deficit  should  be  debited  in  an  Assessment  account  which 
shows  losses  to  be  pro-rated  among  stockholders  and  col- 
lected from  them. 

39  B.  The  Share  of  Each  Stockholder  in  the  capital 
stock  must  be  recorded  also.  If  there  are  few  stock- 
holders, and  these  do  not  expect  to  transfer  their  shares 
actively,  a  line  in  the  Capital  Stock  account  may  be  given 
to  each  stockholder,  showing  his  name  and  the  amount 
to  his  credit.  The  amount  standing  to  the  debit  of  Un- 
subscribed Stock  will  also  be  given  a  line  following  these 
credits,  making  the  total  equal  to  the  entire  capital  as 
shown  by  the  articles  of  incorporation. 

If  a  stockholder  transfers  his  shares  to  another  per- 
son, a  debit  opposite  his  credit  is  entered,  and  the  person 
receiving  the  transferred  shares  is  credited  on  the  next 
line  below.  If  unsubscribed  stock  is  taken,  the  line  in 
the  Capital  Stock  account  credited  for  unsubscribed 
stock  is  debited  for  the  full  amount,  and  two  credits  are 
entered — one  for  the  new  stockholder,  and  one  for  the 
remainder  unsubscribed.  Thus,  the  Capital  Stock  ac- 
count shows  the  names  of  stockholders  and  the  amount 
of  stock  belonging  to  each,  together  with  the  unsub- 
scribed portion. 

39  C.  When  there  are  many  stockholders,  and  when 
the  shares  are  transferred  from  one  holder  to  another 
quite  freely,  a  subsidiary  Stock  Ledger  should  be  used 
which  will  contain  separate  accounts  with  all  stock- 
holders. Each  is  credited  for  his  holdings,  and  charged 
for  his  transfers  of  stock  to  others.  It  should  be  remem- 
bered that  the  transfer  of  stock  from  one  shareholder  to 
another  does  not  involve  any  change  of  values  so  far  as 
the  company  is  concerned,  but  merely  shows  who  is  en- 
titled to  the  benefits  of  the  stock,  and  the  face  value.  " 


PROPRIETORSHIP  ACCOUNTS  57 

The  total  credits  in  the  stock  ledger  should  be  equal 
to  the  credits  of  the  Capital  Stock  account,  less  the 
amounts  standing  in  Unsubscribed  or  Treasury  Stock 
accounts. 

39  D.  Treasury  Stock  is  stock  duly  issued  as  fully 
paid,  and  later  purchased  by  the  issuing  concern,  or  re- 
ceived by  it  as  a  gift.  Treasury  Stock  may  be  sold  by 
the  concern  at  market  price,  which  is  not  the  case  when 
stock  is  first  issued,  for  then  it  must  be  paid  for  at  face. 
The  account  of  Treasury  Stock  is  simply  a  property  ac- 
count, to  be  debited  at  cost  for  the  amount  paid  for  the 
stock,  and,  if  resold,  to  be  credited  as  accounts  of  other 
stocks  not  issued  by  the  concern.  When  Treasury  Stock 
is  received  by  the  concern  as  a  gift  from  stockholders,  it 
is  frequently  the  practice  to  debit  Treasury  Stock  ac- 
count at  par,  and  balance  this  entry  by  an  account  en- 
titled Reserve  for  Treasury  Stock. 

Recapitulation  21-40.  The  section  of  real  accounts 
is  kept  to  show  the  current  financial  condition  of  the  as- 
sets and  liabilities. 

It  is  recommended  that  this  section  of  the  ledger  be 
subdivided  into  (1)  Asset  accounts,  (2)  Liability  ac- 
counts, and  (3  accounts  of  Net  Worth. 

The  Asset  accounts  begin  with  cash,  and  continue, 
followed  by  accounts  and  notes  receivable  and  other  cur- 
rent property,  after  which  follow  fixed  and  invested 
property,  and  that  in  turn  by  accounts  of  things  less 
available  or  real. 

The  Asset  accounts  represent  things  at  cost  valua- 
tion, diminished  by  depreciation,  which  in  the  case  of 
fixed  property  is  shown  in  Reserve  accounts.  Current 
property  is  revalued  from  time  to  time  by  inventory.  Ap- 
preciation in  the  value  of  fixed  property  is  not  entered 
in  the  accounts. 

The  Liability  accounts  follow  the  Asset  accounts. 
They  begin  with  accounts  and  notes  payable,  which  are 
followed  by  long-term  liabilities,  contingent  liabilities, 
etc. 


5S  PRINCIPLES 

Following  the  Liability  accounts,  is  the  part  contain- 
ing the  accounts  of  Net  Worth.  These  accounts  include 
reserves,  surplus,  capital  and  drawing  accounts  of  owners 
or  partners. 

The  real  accounts  should  be  kept  as  far  as  possible 
in  such  a  way  as  to  comprise  a  current  statement  of  assets 
and  liabilities,  and  for  this  reason  it  is  recommended  that 
mixed  accounts  be  excluded.  At  the  close  of  an  account- 
ing period,  the  real  accounts  are  the  basis  of  the  state- 
ment of  assets  and  liabilities. 


CHAPTER  VII 

STATEMENT   OF   PROFIT   AND   LOSS 

41.  Statements  of  Profit  and  Loss.  Any  increase  in 
the  net  worth  of  a  concern  realized  from  sources  other 
than  proprietorship  investments,  is  classed  as  net  income 
or  profit.  Thus,  if  the  net  worth  on  a  certain  date  is  $25,- 
000,  and  on  a  following  date,  is  $30,000,  the  difference, 
$5,000,  if  it  is  not  additional  investment,  is  the  income, 
or  profit,  of  the  intervening  period  of  time.  The  simplest 
way  to  find  the  amount  of  income  for  a  period  of  time  is 
to  compare  statements  of  assets  and  liabilities  dated  at 
the  beginning  and  the  close  of  the  period.  In  preceding 
chapters,  general  rules  have  been  given  for  making  state- 
ments of  assets  and  liabilities,  or  balance  sheets,  suitable 
for  comparisons  of  this  kind.  The  real  accounts  must  be 
kept  so  as  to  occasion  no  false  impressions  as  to  the  ac- 
tual additions  to  or  subtractions  from  the  net  worth. 
The  real  accounts,  however,  do  not  show  by  what  means 
the  income  is  brought  into  the  concern.  They  show 
merely,  when  summarized  in  comparative  statements,  the 
bare  fact  that  the  concern  on  a  given  date  shows  more  or 
less  net  worth  than  it  did  before.  If  the  concern  stands 
better,  the  increase  must  be  the  result  of  business  oper- 
ations or  circumstances  that  the  proprietor  should  find 
worth  while  to  consider  in  more  detail. 

Further  information  explaining  the  elements  of  in- 
come of  expense  is  summarized  in  a  statement  of  profit 
and  loss.  In  this  statement  the  financial  weight  of  the 
various  activities  of  business  are  reflected.  A  name  is 
given  to  each  element  of  income  under  which  the  amount 
flowing  into  the  concern  is  credited;  likewise  a  name  is 
given  to  each  element  of  expense  under  which  the  amount 
flowing  out  of  the  concern  through  that  channel  is  deb- 
ited.   These  descriptive  names  are  the  headings  of  "nom- 

59 


60  PRINCIPLES 

inal"  accounts  which  are  carried  in  the  ledger  as  a  cur- 
rent statement  of  profit  and  loss,  or  income. 

Note. — A  statement  of  incomes  and  expenses  is  usually  called 
a  "profit  and  loss  statement"  or  a  "loss  and  gain  statement"  when 
it  refers  to  the  operations  of  a  trading  or  manufacturing  business. 
However,  the  heading  "statement  of  income,"  meaning  a  state- 
ment of  all  elements  entering  into  net  income,  is  not  out  of  order 
in  this  connection. 

Annual  statements  of  income  are  now  demanded  by 
the  government  from  all  citizens  whose  annual  net  in- 
come or  profits  exceeds  a  specified  sum.  These  state- 
ments must  be  made,  regardless  of  what  books  are  kept. 
The  distinctions  made  in  them  relative  to  sources  of  in- 
come are  of  interest  as  indicating  to  some  extent  what 
nominal  accounts  should  be  kept  in  a  ledger  and  how 
they  should  be  kept.  But  the  income  statement  de- 
manded by  the  government  does  not  indicate  all  the  ac- 
counts desirable  in  business,  for  the  purpose  of  the  gov- 
ernment is  to  make  only  such  rules  as  are  necessary  to 
arrive  at  the  taxable  income,  while  the  business  man  has 
the  additional  purpose,  that  of  discovering  how  he  may 
increase  the  earnings  of  the  business  and  how  he  may 
reduce  unnecessary  expenses. 

42.  Period  Covered  by  Statement.  A  statement  of 
income,  or  profit  and  loss,  refers  to  a  definite  accounting 
period.  One  year  is  the  time  commonly  covered  by  this 
statement.  But  a  monthly  statement  is  a  common  thing 
in  some  businesses,  and  a  daily  statement,  or  report, 
covering  the  same  matters  of  information,  is  also  used 
where  the  nature  and  magnitude  of  the  business  makes 
frequent  reports  desirable. 

It  is  well  to  note  that  the  income  from  a  given  source 
is  not  necessarily  confined  to  the  money  received  from 
that  source  during  a  given  period.  Thus,  a  house  may 
be  let  at  a  rental  of  $600  per  year,  or  $50  per  month.  As- 
suming that  only  $400  of  this  rental  has  been  collected 
during  an  accounting  year  and  that  the  remaining  $200 
is  collectible,  the  income  from  the  house  would  be  the 
entire  $600  earned,  although  only  part  of  it  has  been  re- 
ceived.   Accounts  of  income  do  not  necessarilv  show  cash 


STATEMENT  OF  PROFIT  AND  LOSS         61 

collected,  but  are  quite  likely  to  include  cash  to  be  col- 
lected as  well. 

The  expenses  'of  a  period  are  not  necessarily  iden- 
tical with  the  cash  actually  paid  out  for  expenses.  Thus, 
in  the  last  month  of  an  accounting  year  a  premium  of 
$60  may  be  paid  for  one  year's  insurance.  Assuming 
that  only  one  month's  insurance  cost,  or  a  twelfth  of  the 
whole,  applies  in  the  accounting  period,  only  $5  of  this 
total  payment  should  be  included  as  an  expense  of  that 
year. 

In  a  recent  government  form  for  income  tax  returns 
of  individuals  is  the  following  instruction :  ' i  If  you  keep 
books  showing  income  accrued,  you  may  report  such  in- 
come instead  of  cash  received,  and  you  may  also  report 
expenses  incurred  instead  of  expenses  paid." 

It  makes  little  difference  to  the  government  in  the 
collection  of  taxes  whether  the  percentage  is  based  on 
the  one  or  the  other,  for  either  plan  will  include  in  the 
second  year  what  was  omitted  in  the  first;  but  it  does 
make  a  difference  to  the  business  man  whether  he  bases 
his  income  calculations  on  the  amounts  earned  or  on  the 
amounts  collected.  For  accounting  purposes,  the  income 
earned,  whether  fully  collected  or  not,  and  the  expenses 
incurred,  whether  paid  for  or  not,  are  to  be  considered 
the  incomes  and  expenses  of  a  given  period.  By  this 
means  only  can  the  totals  be  kept  in  condition  for  per- 
centage comparisons. 

43.  Income  and  Profit.  A  concern  may  profit  (1) 
from  the  "primary  incomes"  which  flow  in  as  a  result  of 
the  ordinary  operations  of  the  business;  (2)  from  the 
"secondary  incomes"  which  flow  in  as  a  result  of  busi- 
ness activities  or  investments  not  essential  to  the  plan 
and  purpose  of  the  business;  and  (3)  from  irregular  or 
accidental  sources. 

The  first  requirement  of  a  profit  and  loss  statement 
is  to  exhibit  the  primary  income  as  separate  and  apart 
from  the  other  sources  of  profit,  since  the  success  of  the 
business,  as  such,  is  measured  by  the  primary  income. 
The  object  of  a  business  undertaking  is  to  sell  some  speci- 


62  PRINCIPLES 

fied  line  of  goods  or  service,  hence  the  primary  income  is 
the  proceeds  of  the  sales  of  the  regular  stock  in  trade. 
The  thing  sold  may  be  merchandise  in  a  trading  or  manu- 
facturing business;  land  in  a  real  estate  business;  pro- 
duce or  live  stock  in  farming ;  transportation  in  railroad- 
ing; light,  heat,  power,  water,  telephone  service  in  public 
utility  companies ;  labor  or  service  by  the  individual,  etc. 
Whatever  the  concern  sells  in  accordance  with  its  plan 
of  organization  or  purpose,  is  called  the  "Sales"  of  the 
business;  or  a  modifying  word  may  be  used,  as  merchan- 
dise sales,  produce  sales,  light  sales.  Sales  may  be 
divided  in  one  concern ;  as,  grocery  sales,  meat  sales,  and 
bakery  sales. 

The  sales  of  goods  is  the  principal  source  of  income 
in  most  businesses,  such  as  trading,  manufacturing,  and 
farming.  For  this  reason,  the  manner  of  arriving  at  the 
income  from  dealing  in  goods  is  referred  to  here. 

The  first  item  in  the  statement  is  the  total  amount 
of  sales;  or  if  any  allowances  have  been  made  for  re- 
turned goods  or  other  reasons,  the  first  item  will  be  the 
total  amount  of  sales  less  allowances.  This  amount  is 
placed  in  the  right  hand  column  of  a  two-column  state- 
ment, or  on  the  right  hand  page  of  a  two-page  statement. 

The  second  item  is  the  cost  of  the  sales,  placed  in  the 
left  column  as  a  deduction.  The  cost  of  sales  is  ordi- 
narily found  by  adding  to  the  inventory  of  goods  at  the 
beginning  of  the  period  the  purchases  during  the  period, 
and  from  the  sum  deducting  the  inventory  at  the  close 
of  the  period,  leaving  as  a  remainder  the  cost  of  sales. 
The  cost  of  sales  deducted  from  sales  leaves,  as  a  remain- 
der, the  gross  trading  profit,  which  is  the  principal  in- 
come of  the  business.  This  gross  trading  profit  is  entered 
as  a  balance,  the  statement  is  ruled  and  the  gross  trading 
profit  is  carried  down  to  a  second  section  of  the  state- 
ment. 

After  the  gross  trading  profit,  or  principal  income, 
of  the  business  is  carried  down,  secondary  incomes,  and 
miscellaneous  gains  may  be  itemized  in  the  statement 
and  the  amounts  carried  to  the  right  hand  column  and 


STATEMENT  OF  PROFIT  AND  LOSS  63 

added  to  the  principal  income,  while  the  expenses  are 
itemized  to  the  extent,  desired,  and  carried  to  the  left 
hand  column  as  deductions  from  total  income.  The  sec- 
ond section  may  then  be  balanced,  showing  a  net  profit 
remainder.  Where  additional  profits  consist  of  a  num- 
ber of  items,  or  where  the  expenses  are  divided  into  sev- 
eral classes,  the  additions  and  deductions  may  be  entered 
in  several  sections,  each  of  which  explains  some  special 
phase  of  the  business  operations,  as  will  be  referred  to  in 
detail  later.  But  the  main  point  "to  be  made  is  that  hav- 
ing obtained  the  gross  trading  profit,  the  income  is  re- 
duced, step  by  step,  until  the  net  business  profit  is  found. 

44.  Losses  are  expenditures  which  result  in  a  dimin- 
ishment  of  the  assets  of  the  business.  They  are  divided 
into  (1)  expenses;  (2)  unclassified  losses. 

Expenses  are  the  outlays  for  things  to  be  consumed 
in  carrying  on  the  business.  Such  outlays  may  be  for 
rent,  light,  heat,  insurance,  interest,  taxes,  hired  help, 
and  like  things;  also  for  such  property  as  coal  for  fuel, 
office  stationery,  office  blank  books,  and  such  other 
things  as  would  be  -  consumed  within  the  accounting 
period,  or,  if  lasting  over,  would  be  so  impaired  by  use 
as  to  be  unsalable. 

Unclassified  losses  arise  from  irregular  causes,  such 
as  theft,  gifts,  fires,  accidents,  or  speculations. 

43  A.  Expenses  Divided.  The  term,  Expense,  with- 
out any  qualifying  word,  means  a  loss  expenditure  of  the 
business  as  a  whole.  If  there  is  no  reason  to  make  any 
distinctions,  all  such  expenditures  may  be  grouped  under 
the  one  heading.  Expenses  are  divided,  however,  to  a 
greater  or  less  extent,  as  serves  the  purpose,  on  two  gen- 
eral lines: 

(1)  to  show,  for  comparative  purposes,  the  cost  of 
different  kinds  of  services,  as  suggested  by  the  following 
classifications :    Building  Expense,  Salaries,  Delivery  Ex- 

(2)  To  show  the  cost  of  the  expenses  grouped  as 
charges  applying  to  some  specified  activity  of  the  busi- 
book;  so  that  it  is  not  necessary  for  the  depositor  to 


64  PRINCIPLES 

■ness.  Thus,  a  manufacturing  concern  may  divide  the  ex- 
penses into  Manufacturing  Expense,  Selling  Expense,  Ad- 
ministrative Expense,  Capital  Expense.  These  several 
divisions  are  debited,  to  show,  as  separate  items,  the  ex- 
penses connected  with  making,  selling,  managing,  and 
securing  capital,  although  the  sum  of  all  is  a  charge 
against  the  entire  income  of  the  business. 

45.  Statement  in  One  Section.  The  simplest  income, 

or  profit  and  loss  statement,  contains  one  general  section 

in  two  columns — the  right  for  incomes  and  gains  of  any 

nature;  the  left,  for  expenses,  or  losses  of  any  nature. 

The    statement   is    closed   by   a   balancing    entry   which 

shows  the  excess  of  the  opposite  column,  resulting  in  a 

net  profit  or  net  loss. 

Model  Form  10  R  shows  the  arrangement.  In  this  very  sim- 
ple exhibit,  Charles  Burton  shows  that  at  the  date  of  statement 
he  has  earned  an  income  of  $26.70,  entered  in  the  column  to  the 
right.  During  the  same  period  his  expenses  were  $21.95,  entered 
in  the  column  to  the  left;  resulting  in  a  net  income,  or  profit,  of 
$4.75. 

The  more  extensive  and  diversified  the  business,  the 

more  occasion  there  is  for  dividing  the  profit  and  loss 

statement,  so  that  there  are  statements  of  two,  three,  and 

more  sections.     Statements  of  two  or  more  sections  are 

discussed  in  the  following, numbers. 

46.  Statements  in  Two  Sections.  When  two  sections 
are  used,  the  first  section  exhibits  the  items  comprising 
the  primary  income.  The  net  result  of  the  first  section 
is  carried  down  and  united  with  items  of  a  general  char- 
acter, closing  by  a  balance  showing  the  net  profit  or  loss. 

Form  12  N  is  a  good  illustration  of  a  two-section  statement 
for  a  trading  business.  In  the  first  section,  right  hand  column,  is 
found  the  amount  of  sales.  In  the  same  section,  left  hand  col- 
umn, is  the  cost  of  the  goods  sold,  explained  by  some  computa- 
tions showing  the  means  for  arriving  at  the  cost.  The  balance 
is  carried  down  and  united  with  other  incomes  and  expenses  of  a 
general  character,  resulting  in  a  net  profit  balance. 

Compare  with  Form  9,  on  which  the  annual  incomes  and  ex- 
penses of  a  salaried  man  and  general  investor  are  combined  in  a 
profit  and  loss  statement.  The  first  section  contains  items  that 
have  a  bearing  on  the  net  amount  taxable  under  the  Federal  In- 
come Tax  Law.  The  result  is  a  balance  of  $2512.10,  which  is 
carried  down  to  the  second  section. 


STATEMENT  OF  PROFIT  AND  LOSS  65 

In  the  second  section  are  the  expenses  which  are  not  de- 
ductible from  income  for  taxation  purposes,  but  are  of  interest 
to  the  householder  in  making  up  his  annual  personal  expense 
budget. 

47.  Statement  in  Several  Sections.  When  goods  are 
manufactured  by  the  concern  selling  them,  a  manufactur- 
ing statement  or  manufacturing  section  of  the  profit  and 
loss  statement  is  necessary  in  order  to  exhibit  the  cost  of 
the  product.  This  manufacturing  section  may  be  placed 
first  for  convenience,  although  a  statement  of  profit  and 
loss  logically  begins  with  the  amount  of  the  principal  in- 
come from  which  are  deducted  successively  the  cost  of 
goods  sold,  the  expenses  of  selling,  the  expenses  of  man- 
agement, and  finally  the  expenses  of  capital,  together 
with  miscellaneous  gains  or  losses. 

Form  6  illustrates  the  divisions.  In  the  first  section  (6  A) 
the  cost  of  the  several  items  entering  into  the  manufacture  of 
flour  are  added  together,  deductions  are  made,  showing  that  the 
cost  of  making  the  product  of  that  year  was  $45,934.78. 

The  second  section  (6B)  begins  with  net  sales,  and  after 
deducting  the  cost  of  sales,  leaves  a  remainder  of  $13,705.70,  called 
the  gross  trading  profit,  or  income. 

In  the  third  section  (6  C)  the  gross  trading  profit  is  carried 
down,  to  be  diminished  by  the  selling  expenses,  leaving  as  a  re- 
mainder $7416.40  to  be  carried  down  as  net  trading  profit. 

In  the  fourth  section  (6D)  the  net  trading  profit  is  further 
diminished  by  managing  expenses,  leaving  a  remainder  which  is 
carried  down  to 

The  fifth  section  (6E),  where  it  is  increased  or  diminished 
by  secondary  incomes  and  expenses,  leaving  the  net  profit  for  in- 
vestors as  the  final  result. 

The  form  here  explained  permits  of  percentage  comparisons 
which  are  very  valuable  in  themselves.  It  also  gives  information 
as  to  the  profit  of  the  business  operations  as  apart  from  incidental 
or  accidental  gains  or  losses  which  are  not  necessarily  connected 
with  the  operations  of  the  business. 

48.  Departmental  Statement.  Where  a  business  is 
divided  into  selling  departments,  the  goods  for  sale  are 
entered  by  departments  and  charged  as  though  each  de- 
partment were  a  separate  store.  The  total  sales  of  each 
department  are  exhibited  as  separate  items  and  the  ex- 
penses are  likewise  allocated,  resulting  in  a  separate 
profit  and  loss  statement  for  each  department. 

Form  18  C  illustrates  a  departmental  statement.  There  are 
six  departments,  numbered  from  1  to  6.     The  totals  of  sales,  cost 


66  PRINCIPLES 

of  sales,  and  expenses  for  the  entire  store  are  given  in  the  first 
column,  and  following  it,  the  figures  that  make  these  totals  in  the 
several  departments.  The  result  shown  is  the  entire  gross  profit 
or  loss,  and  the  net  profit  or  loss,  both  for  the  concern  as  a  whole 
and  for  each  department  separately. 

49.  Relation  of  P.  &  L.  Statements  to  Ledger.    The 

profit  and  loss  statement  is  a  financial  summary  of  busi- 
ness operations  taken  from  records.  Its  practical  pur- 
pose is  to  point  out  the  business  activities  that  brought 
profit  and  the  business  necessities  that  caused  loss.  The 
more  clearly  these  elements  are  separated  and  compared, 
the  better  able  is  the  management  to  guide  the  business 
into  profitable  undertakings. 

The  section  of  nominal  accounts  in  the  ledger  may 
be  regarded  as  the  current  profit  and  loss  statement.  It 
contains  the  accounts  preferably  arranged  and  divided 
with  reference  to  the  items  in  the  statement.  At  the  be- 
ginning of  an  accounting  period  all  nominal  accounts  are 
started  anew,  for  a  new  financial  record  of  business  oper- 
ations is  to  be  entered  upon.  The  manager  of  the  busi- 
ness endeavors  to  increase  income  and  to  cut  down  un- 
necessary expense.  His  success  in  doing  so  is  shown  by 
the  amounts  posted  day  by  day  to  the  nominal  accounts. 
At  the  close  of  the  accounting  period  the  nominal  ac- 
count balances  are  transferred  to  the  profit  and  loss 
statement,  where  they  are  rearranged,  condensed  and 
divided  in  the  order  and  manner  thought  most  illuminat- 
ing. At  that  time,  all  nominal  accounts,  having  served 
their  purpose,  are  closed.  In  a  following  accounting 
period,  the  nominal  accounts  are  opened  anew,  and  con- 
tinued until  they  are  again  summarized  in  a  succeeding 
profit  and  loss  statement. 

50.  Illustration  of  Profit  and  Loss  Statements.  In 
order  to  illustrate  the  general  resemblances  in  the  state- 
ments of  profit  and  loss  for  representative  kinds  of  busi- 
ness, and  to  draw  general  distinctions  between  them,  we 
refer,  in  the  following  paragraphs,  to  model  statements 
suitable  for  the  following  enterprises  that  have  to  do 
with  a  loaf  of  bread  from  the  time  the  flour  is  made  to 
the  time  when  the  bread  appears  on  the  table.    The  lines 


STATEMENT  OF  PROFIT  AND  LOSS  67 

of  business  involved  are:  (1)  milling;  (2)  transporta- 
tion; (3)  wholesaling;  (4)  retailing;  (5)  household;  (6) 
banking. 

The  student  will  bear  in  mind  that  the  business  state- 
ments used  for  illustration  can  be  made  only  from  care- 
fully kept  business  accounts.  Yet  any  business  man, 
whether  he  can  keep  books  or  not,  should  be  able  to  read 
and  understand  the  points  to  be  looked  for  in  a  business 
statement. 

Form  6.  The  statement  here  given  is  that  of  the  miller  who 
converts  the  wheat  into  flour.  This  is  a  manufacturing  business, 
and  the  results  of  the  bookkeeping  for  a  year  should  be  condensed 
into  a  Profit  and  Loss  statement  similar  to  the  given  form.  Note 
that  the  first  section  gives  in  general  items  the  costs  entering  into 
the  production  of  flour  and  other  output.  These  costs  are  taken 
from  a  complete  record  of  the  payments  and  expenses,  the  total 
of  which  constitutes  the  "cost  of  product." 

The  trading  section  shows  that  there  was  billed  out  during 
the  year,  mill  product  valued  at  $53,887.74,  but  that  the  mill  took 
back  product  amounting  to  $2,959.66,  leaving  net  sales  $50,928.08. 
The  cost  of  these  sales  is  found  by  adding  to  the  inventory  at  be- 
ginning of  year,  $10,583.26,  the  cost  of  the  year's  product, 
$45,934.78,  and  from  the  sum,  deducting  the  inventory  of  stock  on 
hand,  $19,295.66,  leaving  $37,222.38,  the  net  cost  of  the  product 
sold. 

The  difference,  or  gross  trading  profit,  $13,705.70,  is  carried 
down  to  the  next  section.  Against  this  are  entered  selling  ex- 
penses, office  expenses  and  capital  expenses,  given  in  some  detail. 

The  final  result,  after  all  deductions,  is  the  "net  profit  for 
investors." 

Form  7.  The  railroad,  which  carries  the  flour  to  the  whole- 
sale house,  secures  its  profit  from  carrying  passengers,  freight, 
express  and  mail.  The  original  accounts  of  income  and  expen- 
ditures in  a  large  undertaking  of  this  kind  may  number  200,  more 
or  less,  but  these  several  accounts  are  brought  together  into  gen- 
eral accounts,  of  which  the  items  in  the  statement  are  repre- 
sentative. First,  are  listed  four  items  of  revenue;  the  first  is 
from  ticket  sales;  the  second  from  freight  charges;  the  third, 
from  an  express  company  for  carrying  express;  and  the  fourth, 
from  the  government  for  carrying  mail.  These  combined  produce 
the  gross  earnings  which  are  carried  down  to  the  next  section. 

Against  the  gross  earnings  are  charged  five  general  divisions 
of  operating  expenses. 

A  proper  understanding  of  the  operating  expenses  necessi- 
tates some  knowledge  of  railroading.  Under  the  regulation  of 
railway  accounting  through  the  Interstate  Commerce  Commission, 
each  of  the  five  items  represents  a  definite  kind  of  charges  apply- 
ing to  all  roads.     For  example,  the  first  expense.  Maintenance  of 


6S  PRINCIPLES 

Right  of  Way  and  Structures,  represents  a  group  of  over  twenty 
separate  charges ;  among  these  are,  cost  of  repairing  and  replacing 
ballast,  ties,  rails,  bridges,  buildings,  etc.  The  fourth  expense, 
Transportation  Expenses,  include  about  fifty  primary  charges, 
among  them  fuel,  water,  lubricants,  wages  to  conductors,  brake- 
men,  switchmen,  telegraph  and  telephone  operation,  etc. 

After  deducting  operating  expenses  from  the  gross  earnings, 
there  remain  the  net  earnings  which,  in  the  following  section,  are 
diminished  by  the  capital  charges.  The  item,  "Interest  on  Bonds," 
in  this  group,  arises  from  the  fact  that  a  large  part  of  the  capital 
of  many  railroads  is  provided  by  the  sale  of  bonds  on  which  in- 
terest must  be  paid  periodically. 

This  profit  and  loss  statement  for  a  railroad  is  referred  to 
as  a  representative  statement  for  a  service  business,  and  may  be 
adopted  for  any  other  service  business,  such  as  stables,  garages, 
hotels,  repair  shops,  gas  or  electric  light  and  power  companies, 
educational  institutions,  etc.,  the  titles  for  sources  of  income  and 
for  operating  expenses  being  varied  to  suit  the  business. 

Forms  12  N  and  8.  The  statements  of  profit  and  loss  for 
trading' business  here  given  are  typical  for  wholesale  and  retail 
trading  business  generally,  and  may  be  in  more  or  less  elaborate 
form.  The  statement  may  be  written  on  a  single  page  (like  Form 
12  N)  or  on  two  opposite  pages  like  Form  8,  depending  on  the 
amount  of  analysis  thought  desirable. 

In  Form  8,  the  first  section,  8  A,  shows  the  sales  for  the 
period,  diminished  by  the  cost  of  the  merchandise  sold,  leaving  as 
a  remainder  the  gross  trading  profit.  This  section  is  of  the  ut- 
most value,  as  from  it  may  be  taken  the  volume  of  business,  and 
the  per  cent  of  gross  profit. 

The  second  section,  8  B,  shows  the  gross  trading  profit,  dimin- 
ished by  selling  expenses,  leaving  net  trading  profit. 

The  third  section,  8C,  shows  net  trading  profit  diminished 
by  office  or  administrative  expenses,  producing  the  business  profit. 

The  fourth  section,  8D,  shows  the  business  profit  diminished 
by  capital  expenses,  or  the  expenses  of  borrowing,  and  maintain- 
ing the  value  of  capital  accounts.  The  remainder  is  the  net  profit 
for  distribution. 

Form  9.  In  the  household  profit  and  loss  statement,  there 
appears  first  a  list  of  the  incomes  and  profits  received  from  vari- 
ous sources.  The  item,  "5th  Ave.  Property,"  shows  the  rents  re- 
ceived, diminished  by  the  expenses  for  maintenance  of  the  prop- 
erty.    The  net  income  is  carried  to  the  second  section. 

From  the  net  income  are  taken  the  current  expenses  divided 
into  such  special  accounts  as  desired,  leaving  net  profit  or  deficit 
for  the  year. 

Form  7D.  The  bank  statement  of  profits  and  losses  is  the 
simplest  of  all.  As  shown  from  the  first  section  of  the  statement, 
the  profits  are  derived  from,  (1)  interest  on  the  money  loaned  to 
customers;  (2)  exchange  on  drafts  sold  to  customers  who  buy 
drafts  for  remittance;  (3)  interest  on  bonds  or  other  securities 
owned   by  the  bank;    (4)    charges  for  collecting  paper  for  cus- 


STATEMENT  OF  PROFIT  AND  LOSS  69 

tomers.  The  losses  are,  (1)  salaries  paid  to  the  working  force 
of  the  bank;  (2)  interest  paid  to  certain  depositors  who  leave 
money  at  interest;  (3)  general  expenses,  including  cost  of  books 
and  stationery,  heat,  light,  rent,  insurance,  etc. 

The  second  section  shows  the  distribution  of  profits  into  two 
reserve  accounts,  and  the  remainder  paid  as  dividend  to  the 
owners. 

Recapitulation  41-50.  The  profit  and  loss  statement 
of  a  business  is  derived  from  the  accounts  that  show  the 
incomes  and  expenditures  of  the  business  operations, 
covering  a  definite  period  of  time,  called  the  accounting 
period.  In  a  typical  profit  and  loss  statement,  the  lead 
ing  section  exhibits  the  income  derived  from  the  ordinary 
business  operations,  diminished  by  the  direct  cost  of  pro- 
ducing any  utilities  sold.  This  section  thus  exhibits 
gross  business  profit.  The  gross  business  profit  is  dimin- 
ished by  selling,  administrative,  and  capital  expenses, 
and  increased  by  capital  earnings,  if  any.  The  result  is 
an  exhibit  of  the  net  profit  for  distribution. 

The  detail  to  which  the  various  items  of  income  and 
expenditure  given  in  the  statement  may  be  carried,  de- 
pends on  the  amount  of  information  sought,  but,  in  the 
typical  statement,  shows  the  following  distinct  items  of 
information:  (1)  the  gross  volume  of  business  and  the 
gross  profit  in  the  form  to  derive  the  percentage  of  profit ; 
(2)  the  cost  of  securing  sales;  (3)  the  cost  of  supervision; 
(4)  the  cost  for  capital,  and  the  profit  from  surplus  capi- 
tal; (5)  the  net  profit  for  distribution. 


CHAPTER  VIII 

NOMINAL  ACCOUNTS 

51.  Nominal  Accounts  have  descriptive  names  for 
headings,  to  indicate  the  operations  or  conditions  that 
result  in  profit,  or  in  loss.  The  ordinary  sources  of  in- 
come and  of  expense  are  named  by  a  practically  stand- 
ard set  of  account  titles.  But  one  business  is  likely  to 
develop  at  one  point  or  another  in  ways  out  of  the  ordi- 
nary, and  will  need  distinctive  nominal  accounts  by 
means  of  which  to  locate  unusual  incomes  and  profits  or 
unusual  expenses  and  losses.  Eules  for  the  use  of  stand- 
ard nominal  accounts  and  principles  covering  the  intro- 
duction of  special  nominal  accounts  are  discussed  in  this 
chapter. 

52.  Income  Accounts.  All  incomes  of  a  concern 
may  be  credited  in  an  account  headed,  Income  (see  Form 
10  I).  The  credits  in  this  account  serve  to  specify  the  in- 
come amounts  added  to  the  assets.  If  all  income  is  from 
one  source,  a  man's  salary,  for  instance,  the  single  ac- 
count would  be  satisfactory;  but  as  soon  as  it  is  worth 
while  to  examine  into  several  sources  of  income,  it  is  de- 
sirable to  use  several  income  accounts  instead  of  the  one 
general  account.  For  example,  the  ordinary  income  of  a 
railway  company  may  be  shown  in  four  accounts:  Pas- 
senger Earnings,  Freight  Earnings,  Express  Earnings, 
and  Mail  Earnings;  or,  the  income  of  an  individual  may 
be  shown  in  such  accounts  as  Salary,  Interest  on  Money 
Loaned,  Rents  from  Property,  Dividends  from  Stocks, 
and  Miscellaneous  Profits. 

In  the  above  examples,  the  several  accounts  would 
be  credited  with  the  amounts  as  received,  item  by  item, 
until,  at  the  end  of  the  accounting  period,  the  totals  from 
the  several  sources  are  shown. 

The  income  accounts  may  be  divided  and  subdivided 
to  the  extent  found  necessary  for  full  information  as  to 

70 


NOMINAL  ACCOUNTS  71 

the  sources  of  profit.  A  few  headings  for  income  ac- 
counts, suggestive  of  headings  that  might  be  used, 
follow : 

Wages,  earnings  of  a  person,  usually  computed  on 
work  by  the  day.  ■ 

Salary,  earnings  of  a  person  for  personal  service 
rendered  for  a  period  of  time. 

Attorney's  Fees,  earnings  of  a  lawyer  for  legal 
counsel. 

Livery  Hire,  earnings  of  a  liveryman  for  use  of 
vehicles. 

Light,  earnings  of  a  light  company  for  furnishing 
light. 

Lodging,  earnings  of  a  hotel  for  the  use  of  rooms. 

Passenger  Earnings,  earnings  of  a  railroad  for  carry- 
ing passengers. 

Cartage,,  earnings  received  by  a  dray  line  for  moving 
goods. 

Collections,  earnings  received  by  a  bank  or  person 
for  collecting  paper. 

Commission,  earnings  of  a  commission  merchant  for 
selling  another's  goods. 

Trading,  earnings  of  a  merchant  or  dealer  for 
collecting  and  distributing  goods. 

After  the  titles  of  the  income  accounts  are  deter- 
mined, such  accounts  receive  credit  from  the  books  of 
first  entry,  for  the  income  as  earned,  and  are  debited  for 
any  deductions  from  such  earnings.  At  the  close  of  the 
accounting  period,  the  income  accounts  are  closed  and 
the  balances  carried  to  the  credit  of  Profit  and  Loss.  (See 
Form  10  M  closed  directly  into  Form  10  0 ;  or  12  S  closed 
by  journal  entry,  12  0,  into  12  Y.) 

53.  Expense  Accounts.  All  the  loss  expenditures 
of  a  concern  may  be  debited  in  one  account  headed  Ex- 
pense (see  Form  10  J).  Thus,  expenditures  for  rent,  light, 
heat,  insurance,  taxes,  supplies,  salaries,  wages,  interest, 
and  other  things  consumed  may  be  debited  to  expense; 
also  depreciation,  or  loss  in  value  of  the  business  prop- 
erty through  use.     Expense  covers  the  value  of  things 


72  PRINCIPLES 

consumed  by  the  business.  The  debits  in  this  account 
specify  the  amounts  withdrawn  from  the  assets. 

The  Expense  account  may  be  divided,  according  to 
the  needs  of  a  business,  into  several  accounts.  A  separate 
expense  account  should  be  opened  whenever  it  is  neces- 
sary to  inquire  closely  into  any  one  kind  of  loss  expendi- 
ture. A  small  retail  dealer  may  find  it  advantageous  to 
keep  special  accounts  of  Delivery  Expense,  Freight  In, 
Interest  Expense,  grouping  all  other  expense  items  under 
the  heading,  General  Expense.  A  manufacturing  con- 
crn  may  classify  expenses  in  ten  groups,  distributing  the 
items  under  separate  account  headings,  such  as  Building 
Expense,  Labor,  Power,  Depreciation,  Repairs,  Supplies, 
Salaries,  Insurance,  Taxes,  and  Miscellaneous  Expenses. 
A  railroad,  in  order  to  watch  carefully  each  class  of  the 
great  variety  of  things  consumed,  uses  between  200  and 
300  expense  accounts. 

In  finding  the  total  expense  loss  of  a  given  account- 
ing period,  it  may  be  that  some  things  charged  in  the  ac- 
count have  not  been  used  during  that  accounting  period, 
but  are  carried  over  for  use  in  the  period  next  following. 
For  instance,  a  winter  supply  of  coal  purchased  in  the 
fall  and  charged  to  Expense  may  be  only  partially  con- 
sumed on  December  31,  when  the  books  are  closed.  The 
value  of  the  unconsumed  portion,  as  well  as  the  value  of 
any  other  items  charged  but  not  used,  should  be  credited 
in  the  Expense  account  as  a  deduction  from  total  ex- 
penses of  the  period  covered.  Occasionally,  articles 
charged  to  expense  are  sold.  In  that  case,  the  Expense 
account  is  credited  with  the  amount  of  the  sale. 

The  General  Expense  account  is  closed  into  Profit 
and  Loss  at  the  close  of  the  accounting  period.  (See 
Form  10  N  closed  into  10  O.)  But  when  expenses  are 
divided  on  the  basis  of  operations,  they  are  not  always 
closed  directly  into  Profit  and  Loss,  but  may  be  charged 
to  the  business  operation  involved,  as  discussed  in 
Prin.  54. 

54.  Charges  Against  Operations.  Certain  loss  ex- 
penditures are  not  closed  directly  into  Profit  and  Loss  at 


NOMINAL  ACCOUNTS  73 

the  close  of  an  accounting  period,  but  are  debited  to  an 
Operative  account,  to  which  they  directly  apply. 

54  A.    Expense  of  Income  Bearing  Property.     If  a 

concern  owns  a  building  which  is  let  to  a  tenant,  the  ex- 
penses for  the  upkeep  of  the  building  would  be  a  charge 
against  the  rent  income  from  the  building.  In  Form  11  F, 
an  account  of  the  income  from  a  property  owned  by  a 
concern  and  carried  in  the  books  under  the  heading  "Lot 
8,  Blk.  3  of  Conrad's  Addition,"  is  credited  to  show  the 
rent  income,  and  debited  to  show  the  expenses  of  that 
particular  piece  of  property.  The  account  shows,  as  a 
result,  the  net  income  from  that  property,  which  is  to  be 
carried  to  Profit  and  Loss  instead  of  carrying  the  total 
income  as  a  separate  credit  and  the  total  expense  as  a 
separate  debit.  Any  income  bearing  property,  that  is, 
property  not  used  by  the  concern  in  its  regular  business 
but  by  another  for  a  compensation,  should  show  the  net 
results  of  an  Income  and  Expense  account,  separate  from 
the  Investment  account. 

In  entering  the  expenses  of  a  property,  such  items  as 
repairs,  renewals,  depreciation,  and  commissions  paid  to 
a  renting  agency  are  to  be  debited  against  the  income, 
together  with  interest  on  any  loans  against  the  property 
and  ordinary  taxes  thereon. 

54  B.  Expenses  of  Speculations.  When  any  prop- 
erty is  purchased  purely  for  speculation,  as  a  tract  of 
land  bought  and  held  for  sale,  the  original  cost  and  all 
expenses  are,  as  a  rule,  debited  in  one  account  as  a  charge 
against  the  proceeds  of  the  contemplated  sale.  But 
should  the  property  change  from  a  speculative  venture 
to  an  income  bearing  investment,  it  would  be  advisable 
to  divide  the  account,  carrying  the  investment  as  an 
asset,  and  the  income  and  expense  pertaining  to  it  in  a 
separate  nominal  account. 

A  course  followed  by  conservative  real  estate  com- 
panies and  highly  commended  by  accountants,  is  to 
charge  the  expenses  of  tracts  of  land  which  they  are  pre- 
paring for  sale  to  Expense  accounts  separate  from  the 


74  PRINCIPLES 

Property  accounts ;  so  that  the  expenses,  instead  of  being 
"  capitalized, ' '  are  closed  into  the  Profit  and  Loss  account 
of  the  year  in  which  they  occurred.  When  so  done,  a 
memorandum  entry  of  the  expenses  is  made  in  the  Prop- 
erty account  for  convenience  in  determining  the  entire 
amount  of  money  placed  in  the  venture. 

54  C.  Freight  and  Transfer  Charges  In.  The  freight 
charges  on  goods,  materials,  or  equipment  bought  are 
chargeable  to  the  same  account  as  the  thing  bought. 
Thus,  freight  on  merchandise  purchases  is  debited  to  the 
Merchandise  Purchases  account,  on  materials  to  Ma- 
terials account,  on  furniture  to  the  Furniture  account, 
etc.  A  separate  account  of  Freinght-in  is  often  kept  and 
debited  for  all  expenditures  on  incoming  freight,  but 
should  be  closed  later  into  the  accounts  to  which  the 
specific  items  apply. 

54  D.  Freight- Outward.  An  account  of  freight  on 
sales  is  to(be  handled  in  one  of  two  ways:  (1)  If  it  rep- 
resents freight  prepaid  and  charged  to  the  customer  in 
his  bill — a  custom  in  many  houses — the  amount  of 
freight-out  is  credited  in  the  Trading  account  as  sales.  (2) 
If  it  is  prepaid  but  not  charged  to  the  customer,  that  is, 
if  the  prepayment  is  a  selling  inducement  to  the  pur- 
chaser, the  account  is  treated  as  a  selling  expense. 

54  E.  Expenses  of  Shipments.  When  goods  are  sent 
to  commission  houses  for  sale  on  account  of  the  con- 
signor, the  shipping,  insuring,  and  any  incidental  ex- 
penses connected  therewith  are  debited  to  the  Shipment 
account,  together  with  the  cost  of  the  goods  sent.  All  ex- 
penditures connected  with  the  shipment  are  treated  as 
one  combined  charge  against  the  proceeds  of  the  sale. 

54  F.  Expenses  of  Departments.  When  business  is 
departmentalized,  the  expenses  should  be  charged  to  the 
consuming  departments  instead  of  to  the  organizations 
as  a  whole.  Thus,  in  a  department  store,  which  may  have 
all  the  way  from  two  to  two  hundred  departments,  sell- 
ing as  many  kinds  of  merchandise,  each  department  or 
department  group  is  under  a  manager,  or  buyer,  who  is 


NOMINAL  ACCOUNTS  75 

responsible  for  the  success  of  his  department.  Each  de- 
partment is  charged  for  all  expenses  incurred  for  its 
maintenance,  including  its  share  of  floor  space,  light, 
heat,  salaries,  advertising,  depreciation,  stationery,  etc. 

A  branch  store  is  similarly  conducted  by  a  manager, 
and  the  expenses  are  included  in  a  separate  expense  ac- 
count for  that  store. 

54  G.  Expenses  of  Manufacturing.  Manufacturing 
expenses  include  all  the  items  of  loss  expenditures  in- 
volved in  making  goods,  except  the  cost  of  material  and 
productive  labor.  The  expenses  of  making  are,  of  course, 
distinguished  from  the  selling  and  general  expenses  of 
the  business,  the  first  mentioned  only  being  considered 
manufacturing  expense  or,  as  the  term  is  often  used, 
"factory  overhead,"  or  "burden."  These  expenses  in- 
clude the  rent  and  upkeep  of  the  shops  and  storage  space 
where  the  work  is  done,  the  nonproductive  labor  of  stock 
keepers,  watchmen  and  other  employees,  power,  deprecia- 
tion on  factory  machinery  and  equipment,  repairs,  fac- 
tory supplies,  salaries  of  factory  officers,  insurance,  taxes, 
etc., — in  fact  all  expenses  incurred  in  making  goods,  as 
opposed  to  the  expenses  incurred  in  disposing  of  the 
goods  after  they  are  made.  Manufacturing  expenses  are 
charged  as  a  part  of  the  cost  of  the  manufactured  articles 
and  therefore  are  treated  as  assets  and  not  as  losses. 

55.  Gross  Trading  Profit.  Buying  and  selling  goods 
is  the  principal  activity  of  the  trading  business  and  the 
principal  source  of  income.  For  this  reason,  the  business 
man  should  watch  closely  as  separate  items  (1)  the 
amount  of  sales  as  shown  by  the  Sales  account,  (2)  the 
amount  of  purchases  as  shown  in  the  Purchases  account, 
(3)  the  amount  of  capital  tied  up  in  this  activity  as 
shown  in  the  Inventory  account.  In  the  absence,  of  a  unit 
cost  system,  which  is  impracticable  in  handling  the  many 
small  articles  sold  in  retail  stores  generally,  the  three  ac- 
counts mentioned  are  combined,  at  the  close  of  an  ac- 
counting period,  in  a  Trading  account,  the  purpose  of 
which  is  to  show  the  gross  income,  or  profit,  from  buying 


76  PRINCIPLES 

and  selling.     These  accounts  are  carried  and  closed  as 
explained  in  the  following  numbers. 

55  A.  Sales.  The  Sales  account  (Form  12  Q  or  14  G) 
is  credited  to  show  the  amounts  of  trading  goods  sold,  as 
found  in  the  sales  records;  is  debited,  to  show  any  re- 
bates, allowances,  or  deductions  which  diminish  the 
amounts  received,  or  to  be  collected,  from  the  sale  of 
goods. 

By  "Sales"  is  meant  the  sales  out  of  the  stock  in 
trade  only.  Any  chance  sale  of  fixed  property  or  expense 
material  should  not  be  included  in  the  Sales  account,  but 
should  be  entered  as  a  separate  item. 

At  the  close  of  the  accounting  period,  the  account  is 
closed  and  the  balance  is  carried  into  the  Trading 
account. 

55  B.  Purchases.  The  Purchases  account  (Form 
12  R  or  14  H)  is  debited  to  show  the  cost  of  trading 
goods  bought;  is  credited,  to  show  any  rebates,  allow- 
ances, or  other  deductions  from  the  amount  paid,  or  to 
be  paid,  for  the  trading  goods  bought. 

Included  in  this  account  are  the  invoice  cost  of  the 
goods,  the  freight  and  transfer  charges  in,  storage  and 
warehouse  charges,  import  duties,  or  other  expenses  at- 
tached to  the  goods  before  they  are  placed  in  the  sales 
stock. 

At  the  close  of  the  accounting  period,  the  account  is 
closed  and  the  balance  is  carried  to  the  debit  of  the  Trad- 
ing account. 

The  invoice  purchases,  freight-in,  and  returned  pur- 
chases, are  sometimes  carried  under  separate  headings, 
but  these  divisions  of  the  Purchases  account  close  into 
Purchases,  or  into  the  Trading  account  which  amounts  to 
practically  the  same  thing. 

55  C.  Manufactured  Goods.  When  the  goods  sold 
are  manufactured  instead  of  being  purchased  ready 
made,  the  cost  of  material,  labor,  and  expenses  of  making 
are  ascertained  and  debited  in  an  account  headed  Manu- 
factured Goods,  or  Finished  Goods,  or  Completed  Prod- 


NOMINAL  ACCOUNTS  77 

uct,  which  is  related  to  the  Sales  account  in  precisely  the 
same  way  as  Purchases. 

55  D.  Inventory  as  Related  to  Trading.  If  there 
were  no  stock  in  trade  at  either  the  opening  or  the  clos- 
ing of  the  accounting  period,  the  Purchases  account 
would  show  the  cost  of  the  goods  sold,  and  when  sub- 
tracted from  sales  would  leave  the  gross  trading  profit. 
In  a  going  business,  however,  there  is  stock  on  hand  at 
the  beginning  and  also  at  the  close  of  the  accounting 
period.  If  the  stock  at  the  beginning  is  greater  than  the 
stock  at  closing,  the  difference  has  passed  out  and 
should  be  regarded  as  an  addition  to  the  amount  of  pur- 
chases in  the  Trading  account  to  show  the  entire  cost  of 
the  goods  sold.  If  the  stock  on  hand  at  the  beginning 
was  less  than  the  stock  at  closing,  the  difference  repre- 
sents purchases  that  have  not  been  sold  but  are  carried 
by  inventory  over  into  the  next  accounting  period. 

In  order  to  take  into  account  the  increase  or  decrease 
in  stock  of  goods,  it  is  customary  to  close  the  amount  of 
the  inventory  at  beginning  into  the  Trading  account 
(debit  side),  thus  adding  the  beginning  inventory  to  the 
purchases.  The  amount  of  the  inventory  at  the  close  of 
the  accounting  period  is  entered  in  the  Trading  account 
(credit  side),  thus  adding  the  amount  to  sales.  In  the 
trading  statement,  as  before  explained,  the  opening  in- 
ventory, plus  purchases,  less  closing  inventory,  leaves  an 
amount  called  the  "cost  of  sales."  The  Ledger  account 
does  not  lend  itself  to  both  addition  and  subtraction  in 
the  same  column,  hence  the  same  effect  is  secured  by  add- 
ing the  closing  inventory  to  the  credit  side  instead  of 
subtracting  it  from  the  debit  side. 

At  the  close  of  the  accounting  period,  the  Trading 
account  is  closed  into  Profit  and  Loss. 

56.  Selling  Expense  includes  the  outlays  made  in 
effecting  sales  of  the  trading  goods  from  the  time  the 
goods  are  laid  down  in  the  store,  until  disposed  of.  It  is 
often  best  to  charge  all  selling  expenses  to  one  account, 
while  under  some  conditions,  a  number  of  special  divi- 
sions will  serve  the  purpose  better.     Among  these  are 


78  PRINCIPLES 

(1)  Salaries  of  sales  manager  and  sales  clerks;  salaries, 
commissions  and  road  expenses  of  traveling  men;  sal- 
aries and  wages  of  shipping  clerks;  (2)  Cost  of  free  sam- 
ples and  expenses  of  demonstrations,  exhibits,  etc;  (3) 
Advertising,  including  postage  and  expressage  applied  to 
advertising;  (4)  Supplies,  including  cartons,  wrapping 
material  and  incidentals;  (5)  Delivery  expense  (not 
charged  to  customers) ;  and  (6)  Depreciation  (in  prop- 
erty used  by  the  selling  department). 

Such  special  accounts  are  to  .be  opened  as  they  are 
needed  to  give  detailed  information  about  this  class  of 
expenditures,  and  are  to  be  discontinued  when  they  are 
not  needed. 

At  the  close  of  the  accounting  period,  the  special  ac- 
counts are  closed  into  Profit  and  Loss,  or  they  may  be 
closed  into  the  general  Selling  Expense  account  which,  in 
turn,  is  closed  into  Profit  and  Loss. 

57.  General  Expenses,  or  General  Overhead,  in- 
cludes the  expenses  of  the  general  oversight  and  manage- 
ment of  the  business,  and  may  be  charged  to  either  of 
the  foregoing  titles,  or  may  be  charged  to  various  special 
accounts,  such  as:  (1)  Salaries  of  the  office  force;  (2) 
Office  Supplies,  including  blank  books,  stationery  and 
postage,  not  directly  applied  to  advertising;  (3)  Light, 
Heat,  Rent,  Taxes  and  Insurance;  (4)  Depreciation,  in 
property  for  office  use;  (5)  Interest  and  Discount. 

Such  special  accounts  may  be  closed  directly  into 
Profit  and  Loss  at  the  close  of  the  accounting  period,  or 
they  may  be  closed  into  Office  General  Expense,  which  in 
turn  is  closed  into  Profit  and  Loss. 

58.  Diminishment  in  the  value  of  things  owned  by 
a  concern  is  to  be  included  among  the  expenses.  This 
factor  bearing  on  income  is  not  brought  to  the  attention 
by  business  transactions,  and  unless  looked  for  in  a  sys- 
tematic way  will  be  disregarded  often  with  disastrous  re- 
sults. Included  under  this  heading  are:  (1)  Shrinkage 
in  value  of  accounts  and  notes  receivable  due  to  certain 
items  becoming  uncollectible  or  doubtful;  (2)  Deprecia- 
tion, the  ordinary  loss  in  value  of  fixed  property  assets 


NOMINAL  ACCOUNTS  79 

through  wear  and  tear  or  obsolescence;  (3)  Expiration  of 
the  benefits  of  patent  rights,  copyrights,  franchises,  pat- 
terns and  drawings,  etc.;  (4)  Depletion,  the  exhaustion 
of  resources  such  as  mines,  timber,  or  land  through  crop- 
ping. The  diminishment  in  the  value  of  assets  during  an 
accounting  period  is  a  real  subtraction  from  income. 

58  A.  Shrinkage  in  Accounts  and  Notes.  The  loss 
sustained  through  accounts  and  notes  becoming  doubtful 
or  uncollectible  is  probably  best  taken  care  of,  in  ordi- 
nary books,  by  charging  the  accounts  to  Profit  and  Loss. 
If  bad  accounts  are  few  in  number,  and  are  to  be  followed 
up  as  though  collectible,  they  may  be  plainly  marked, 
'  'charged  to  Profit  and  Loss"  so  as  not  to  be  included  in 
a  list  of  accounts  receivable,  and  otherwise  left  in  the 
ledger  as  before.  The  collection  of  any  such  accounts 
should  be  credited  to  Profit  and  Loss. 

Where  there  are  many  such  accounts,  to  be  consid 
ered  separately,  they  may  be  removed  to  a  '/doubtful 
ledger,"  after  being  charged  off,   and  there  kept  as  a 
memorandum  record. 

If  an  estimate  of  the  loss  through  doubtful  accounts 
is  made,  as  when  one  considers  a  number  of  doubtful  ac- 
counts to  be  worth  on  the  whole  one-half  their  face,  the 
assumed  shrinkage  may  be  charged  to  Profit  and  Loss 
and  credited  to  Reserve  for  Doubtful  Accounts. 

58  B.  Depreciation.  The  loss  in  the  value  of  build- 
ings, machinery,  and  equipment  through  depreciation 
should  be  debited  as  an  expense  of  factory,  office,  or  any 
part  of  the  business  making  use  of  the  property.  The 
balancing  entry  is  a  credit  to  an  account  headed,  Reserve 
for  Depreciation,  as  explained  in  Prin.  24. 

No  standard  tables  of  depreciation  appear  to  have 
been  made,  since  the  term  of  usefulness  of  property  de- 
pends on  what  it  is  and  how  it  is  used.  The  government 
income  tax  instructions  seem  to  set  a  maximum  of  three 
per  cent  annually  on  buildings  and  ten  per  cent  annually 
on  machinery. 

If  an  account  of  Depreciation  is  carried,  all  deprecia- 


80  PRINCIPLES 

tion  is  first  debited  in  that  account  and  then  credited  out 
by  distribution  to  the  expense  accounts. 

58  C.  Expiration.  Patent  rights  expire  in  seventeen 
years,  copyrights  in  forty-two  years,  and  franchises  ac- 
cording to  terms  granted.  Their  commercial  value,  how- 
ever, frequently  expires  long  before  the  legal  expiration. 
The  book  value  of  these  items  should  be  written  off  pro- 
portionately year  by  year  by  a  debit  to  Profit  and  Loss, 
with  a  view  to  finally  clearing  the  accounts  from  the 
books.  The  credit  is  most  clearly  shown  in  the  Asset  ac- 
count, since  there  is  no  reason  for  setting  up  a  reserve  for 
something  that  is  not  to  be  replaced. 

58  D.  Depletion.  The  value  taken  from  mines,  quar- 
ries, timberland,  etc.,  does  not  call  for  any  Reserve  ac- 
count, since  the  property  consumed  is  not  to  be  replaced ; 
but  as  in  the  case  of  expirations,  should  be  credited  in  the 
asset  account,  the  balancing  debit  being  in  Profit  and 
Loss. 

59.  Secondary  Incomes  and  Expenses  arise  from  the 
use  of  money  or  property  or  from  operations  in  other  than 
the  regular  channels  of  the  business.  In  the  preceding 
numbers  of  this  chapter  have  been  outlined  the  accounts 
showing  in  consecutive  order  Sales,  diminished  by  Cost 
of  Sales,  further  diminished  by  Selling  Expenses,  and  the 
remainder  by  General  Expenses,  the  final  result  being  the 
Business  Profit. 

In  addition  to  the  principal  operation  of  the  business 
reflected  in  these  accounts,  the  concern  may  derive  in- 
come or  incur  expense  in  a  number  of  ways,  as  shown  in 
the  following  accounts: 

59  A.  Interest  and  Discount.  An  account  headed, 
Interest  and  Discount,  or  Interest,  is  debited  to  show  loss 
expenditures  for  money  or  credit  received  by  the  con- 
cern ;  credited,  for  income  from  money  or  credit  given  by 
the  firm. 

The  discount  referred  to  is  the  interest  charged  by 
bankers  for  discounting  notes  or  accounts. 


NOMINAL  ACCOUNTS  81 

The  Interest  account  is  often  better  divided  into  In- 
terest Expense  and  Interest  Income. 

59  B.  Cash  Discounts.  An  account  headed,  Cash 
Discounts,  or  Merchandise  Discounts,  is  debited,  to  show 
amounts  allowed  customers  for  settlement  of  invoices 
within  a  specified  time;  credited,  to  show  the  deductions 
from  creditors'  invoices  for  payment  within  a  specified 
time. 

This  account  is  frequently  divided  into  Sales 
and  Purchase  Discounts.  It  is  quite  customary  in 
retailing  to  credit  purchase  discount  to  the  Purchases  ac- 
count, especially  in  department  stores  where  discounts 
received  are  considered  as  a  credit  to  the  management  of 
the  buyer,  hence  a  deduction  from  Purchases  rather  than 
as  secondary  income.  In  wholesaling,  cash  discounts  are 
generally  treated  as  secondary  incomes  or  expenses. 

59  C.  Income  and  Expense  of  property  owned  by  the 
concern  but  not  used  in  the  business  is  classed  as  second- 
ary income. 

59  D.    Miscellaneous  Profits  and  Losses.    Theft,  loss 
of  money,  fire  losses,  gifts,  gains  or  losses  on  sales  of  fixed 
property,   and   other   unusual   losses   or    gains   are    suf-. 
ficiently  well  located  if  debited  or  credited  directly  in  thcv. 
Profit  and  Loss  account  when  they  occur. 

60.  The  Profit  and  Loss  Account  is  the  permanent 
ledger  record  of  the  incomes  or  profits  (credit  side),  and 
the  expenses  or  losses  (debit  side),  accumulated  during 
the  accounting  period. 

Unclassified  gains  or  losses  are  carried  directly  to 
this  account  from  the  original  entries,  so  that  the  Profit 
and  Loss  account  is,  up  to  the  time  of  closing  the  books., 
a  current  list  of  the  odds  and  ends  of  gain  and  loss  aris- 
ing from  unuausl  channels.  This  part  of  the  account,  or,' 
occasion,  may  be  separated  from  the  closing  Profit  and 
Loss  account  by  being  carried  in  a  current  account  en- 
titled Miscellaneous  Losses  and  Gains,  or  Loss  and  Gain 
which  at  the  close  of  the  period  should  be  closed  into 
Profit  and  Loss. 


82  PRINCIPLES 

The  regular  income  and  expense  accounts,  that  is,  all 
nominal  accounts,  should  be  closed  into  Profit  and  Loss 
at  the  end  of  the  period.  After  all  nominal  account  bal- 
ances are  found  in  Profit  and  Loss,  this  account  is  bal- 
anced and  the  balance  disposed  of  as  follows : 

(1)  In  a  sole  proprietorship,  the  balance  may  be  car- 
ried to  the  Capital  account,  or,  if  the  capital  is  to  remain 
at  a  stated  amount/to  the  proprietor's  Drawing  account. 

(2)  In  a  partnership,  the  balance  of  the  Profit  and 
Loss  account  is  divided  among  partners  in  accordance 
with  their  terms  of  agreement,  and  carried  to  their  Capi- 
tal or  Drawing. accounts  as  in  the  case  of  a  sole  pro- 
prietorship. 

(3)  In  a  corporation,  the  balance  is  carried  to  the 
Surplus  account,  provided  there  is  a  surplus ;  if  not,  to  a 
Deficit,  or  Assessment  account. 

Having  closed  the  Profit  and  Loss  account,  all  nom- 
inal accounts  are  closed  and  completed.  The  results  ex- 
hibited by  them  are  summarized  in  the  accounts  of  net 
worth. 

Recapitulation  51-60.  The  nominal  accounts,  kept  to 
indicate  the  operations  or  conditions  that  have  resulted 
in  profit  or  loss,  are  divided  into  accounts  of  income  and 
accounts  of  expense.  Income  accounts  are  credited  to  ex- 
plain increases  in  the  net  assets;  Expense  accounts  are 
debited  to  explain  decreases  in  the  net  assets. 

The  expenses  of  specific  business  operations  are 
charged  against  the  income  from  the  operations,  leaving 
a  balance  which  at  the  end  of  the  accounting  period  is 
carried  to  Profit  and  Loss. 

General  Expense  accounts  close  directly  into  Profit 
and  Loss. 

Incidental  or  unusual  gains  or  losses  are  posted  to 
Profit  and  Loss  from  the  original  entries. 

When  all  nominal  accounts  are  closed  into  Profit  and 
Loss,  the  latter  account  shows,  as  credits,  all  profits  and 
as  debits,  all  losses,  of  a  given  accounting  period.  The 
balance  of  the  Profit  and  Loss  account  is  closed  into  the 
accounts  summarizing  the  net  worth. 


PART  TWO— RULES 
CHAPTER  IX 

SINGLE  AND  DOUBLE  ENTRY 

61.  Single  and  Double  Entry.  Bookkeeping  systems 
are  known  as  single  entry  and  double  entry.  Several 
points  of  difference  between  the  two  are  discussed  under 
Auditing ;  a  practical  distinction  is  referred  to  here. 

Single  Entry.  By  single  entry  there  is  usually  at- 
tempted a  record  of  three  kinds  of  accounts  only — the 
Cash  account,  Accounts  Keceivable,  and  Accounts  Pay- 
able. Hence,  an  entry  is  made  with  a  view  to  the  effect 
of  transactions  on  the  three  elements  of  the  concern  men- 
tioned regardless  of  other  elements  of  the  concern  for 
which  no  accounts  are  kept.  This  implies  an  entry, 
either  debit  or  credit,  for  only  one  side  of  a  transaction, 
disregarding  the  other  side — hence  single,  or  one-sided, 
entry;  but  in  single  entry  a  debit  is  made  in  Cash 
and  a  corresponding  credit  in  a  customers'  account,  be- 
ing double  entry  to  that  extent.  A  " single  entry"  sys- 
tem seems  to  be  any  bookkeeping  system  that  falls  short 
of  double  entry. 

Double  Entry.  In  double  entry  bookkeeping,  an  at- 
tempt is  made  to  keep  accounts  of  all  elements  involved 
in  all  transactions.  The  effect  of  any  transaction  is 
shown  by  debit  entry  in  one  or  more  accounts,  and  credit 
entry  in  another  or  other  accounts.  Both  debits  and 
credits  are  entered — hence  " double  entry."  The  equality 
of  debits  and  credits  in  each  transaction  is  followed  by 
equality  of  the  sum  of  all  debits  and  the  sum  of  all  credits 
after  posting.  This  makes  possible  the  proof  of  accu- 
racy by  trial  balance,  which  is  impossible  in  single  entry. 

The  mere  fact  that  every  debit  entry  must  have  a 
corresponding  credit  entry,  gives  the  bookkeeper  occa- 

83 


84  RULES 

sion  to  look  into  the  debit  and  credit  elements  involved, 
transaction  by  transaction,  thus  stimulating  inquiry  into 
the  forces  that  contributed  to  the  success  of  the  business. 
Double  entry  does  not  necessarily  imply  an  effective  ac- 
count classification,  but  it  does  necessitate  some  sort  of 
attention  to  all  the  elements  of  property  and  operations. 
And  it  is  on  the  values  within  a  business  concern  as 
shown  by  the  accounts,  and  their  relation  one  to  another, 
that  the  manager  must  depend  for  an  effective  use  of  the 
resources  at  his  command. 

In  the  study  of  bookkeeping  as  a  science,  single 
entry  is  given  but  limited  attention,  not  because  it  is  use- 
less, but  because  double  entry  is  more  comprehensive.  It 
must  be  kept  in  mind,  however,  that  such  accounts  as  are 
kept  in  single  entry  are  kept  in  precisely  the  same  way, 
and  mean  precisely  the  same  as  though  found  in  double 
entry.  Many  business  men,  especially  in  small  concerns, 
may  find  that  a  few  accounts  are  desirable,  and  can  be 
kept  in  memorandum  form  by  a  person  who  would  find  it 
difficult  to  use  a  double  entry  system  properly, 


CHAPTER  X 


BUSINESS  PAPERS 


Business  Papers.  The  first  records  of  business  trans- 
actions are  usually  made  on  business  papers,  partly 
printed  and  partly  written.  These  forms  pass  between 
the  parties  to  the  transactions.  Thus,  when  goods  are 
sold,  a  bill  or  invoice,  naming  the  terms  and  listing  the 
things  sold  with  prices  and  amount,  is  passed  by  the 
seller  to  the  buyer.  If  one  makes  a  cash  payment,  the  per- 
son receiving  the  payment  should  give  the  payer  a  re- 
ceipt. Transactions  sometimes  occur  without  a  written 
form  passing  between  the  parties,  but  this  is  not  the  rule. 
The  papers  that  give  the  particulars  about  transactions: 
are  used  as  vouchers  by  the  bookkeeper  in  making  his- 
records.  A  voucher  is  a  written  evidence  of  a  transaction. 
After  the  entries  are  made,  the  vouchers  should  be  pre- 
served for  future  reference. 

In  the  following  numbers,  Prin.  62-69,  forms  of  busi- 
ness papers,  many  of  which  are  used  as  vouchers,  are 
discussed. 

62.    Forms  Used  in  Banking  Transactions : 

Signature  Card  (Form  15  A) .  When  a  depositor 
opens  an  account  with  a  bank,  he  is  required  to  write  his 
signature  on  a  signature  card  or  in  a  blank  book  pro- 
vided for  that  purpose.  Depositors'  signatures  are 
kept  where  the  paying  teller  may  quickly  refer  to 
them  for  comparison  with  the  signatures  on  the  de- 
positors' checks,  when  checks  are  presented  for  payment. 
A  depositor  should  write  his  name  in  his  ordinary,  plain 
hand  writing  without  attempt  at  peculiarity  in  style. 
In  signing  his  checks  he  should  make  no  variation  in  the 
form  of  his  signature.  While  a  teller  is  responsible  to 
the  depositor  for  the  genuineness  of  the  signature  on 
the  checks  which  he  pays,  the  depositor  is  responsible 
for    delays  or  losses  occasioned  by  signing  checks  in  an 

85 


86  RULES 

unusual  form  or  handwriting.  A  teller  is  justified  in 
refusing  a  check,  even  though  genuine,  when  the  signa- 
ture shows  any  material  variation  from  the  signature 
as  filed  with  the  bank. 

Deposit  Tickets  (Form  15  B)  are  provided  by  the 
banker.  On  these  the  depositor  enters  the  amount  to 
be  deposited.  On  making  a  deposit,  the  bills  should  be 
face  side  up,  all  bills  of  the  same  denomination  being 
placed  together.  Coin  in  any  quantity  should  be  brought 
in  a  sack.  The  deposit  ticket  and  the  currency  are 
passed  to  the  teller.  The  form  shows  the  deposit  made 
up  of  currency,  coin,  and  other  cash  items.  When  a 
great  many  items  are  included  in  a  deposit,  bankers  pre- 
fer, and  sometimes  insist,  that  they  be  entered  on  the 
ticket  in  considerable  detail. 

Depositors'  Pass  Books  (Form  15  C).  On  receipt  of 
the  first  deposit,  the  teller  opens  a  Depositor's  Book, 
which  he  delivers  to  the  depositor.  This  is  a  book  to  be 
carried  by  the  depositor,  and  presented  by  him  to  the 
bank  teller  with  his  deposits.  The  teller  enters  each  de- 
posit in  this  book,  when  made,  in  the  proper  columns  to 
show  the  date,  explanation  and  amount.  This  book  serves 
the  depositor  as  receipts,  from  the  bank,  for  the  amounts 
deposited. 

Formerly,  it  was  the  custom  among  banks  to  enter 
the  deposits  on  the  left  page  of  the  pass  book,  as  above 
explained,  reserving  the  right  page  for  the  entries  of 
paid  checks,  which  were  written  in  by  the  bank  book- 
keeper when  the  pass  book  was  left  at  the  bank  to  be 
balanced,  usually  at  the  end  of  the  month.  After  enter- 
ing the  checks,  the  bank  bookkeeper  balanced  the  pass 
book,  ruled  it,  and  carried  the  balance  down;  then  re- 
turned the  book  with  the  cancelled  checks  to  the  deposi- 
tor. This  custom  yet  prevails  in  many  small  banks, 
pense,  Commission,  Interest  Expense,  Repairs,  etc. 

At  present,  commercial  banks  find  it  more  satis- 
factory to  render  monthly  statements  (see  Form  15  G) 
to  depositors,  without  any  reference  to  the  bank  pass 


BUSINESS  PAPERS  87 

leave  his  book  at  the  bank  to  be  "written  up,"  as  for- 
merly. When  the  statement  method  is  in  use,  the  bank 
pass  book  is  merely  the  teller's  memoranda  of  deposits 
to  be  carried  by  the  depositor. 

Check  Books  (Forms  15  D-E)  are  usually  supplied  to 
the  depositor  by  the  bank.  They  may  contain  from  twenty 
to  several  hundred  checks,  with  one  or  several  checks  to 
the  page.  At  the  left  of  each  check  is  the  stub,  which  is 
separated  from  the  check  at  a  perforated  line,  and  re- 
mains in  the  book  after  the  check  is  detached. 

A  very  good  form  of  check  stub  is  illustrated  in  Form 
15  D,  in  which  the  first  deposit,  $1000,  is  entered  by  the 
depositor  in  the  space  provided  for  that  purpose.  The 
record  of  the  first  check  drawn  is  written  on  the.  stub, 
and  the  amount  deducted  from  the  deposit  shows  a  bal- 
ance of  $970,  carried  forward.  Stub  No.  2  (Form  15  E) 
shows  the  balance  carried  from  Stub  No.  1,  and  a  second 
deposit  of  $50.25,  making  a  total  of  $1020.25.  From  this 
amount,  check  No.  2  is  deducted,  leaving  a  balance  of 
$856.05  to  be  carried  forward  to  the  third  stub,  so  con- 
tinuing. Thus,  when  a  check  is  to  be  written,  the  balance 
remaining  in  the  bank  is  always  shown  on  the  last  stub. 

In  some  check  books,  the  stubs  are  interleaved  al- 
ternately with  the  checks.  In  check  books  of  this  form, 
there  is  more  space  on  the  stubs  for  figuring. 

Endorsements  (Form  15  F).  Checks  or  drafts  when 
taken  to  the  bank  for  deposit,  or  when  transferred  to 
other  holders,  must  be  endorsed.  For  endorsements  trans- 
ferring title,  five  different  forms  are  given.  Of  the  trans- 
fer endorsements,  No.  1  is  called  an  "endorsement  in 
blank; "  No.  2,  an  "endorsement  in  full;"  No.  3,  an  "en- 
dorsement without  recourse;"  No.  4,  a  "restrictive  en- 
dorsement;" No.  5,  an  "endorsement  for  deposit."  The 
last  named  form  would  be  used  in  endorsing  the  checks 
included  in  a  deposit,  although  the  first  form  is  fre- 
quently used. 

Note. — The  two  endorsements  to  the  right  of  the  form  apply 
to  notes. 


88  RULES 

Statement  of  Checking  Account  (Form  15  G) .  At  the 
-close  of  the  month,  the  bank  bookkeeper  renders  to  the 
depositor  a  statement  of  his  checking  account,  and  re- 
turns with  the  statement  the  depositor's  paid  and  can- 
celed checks.  In  the  form  referred  to,  two  columns  are 
reserved  for  the  entry  of  checks,  and  one  column  for  de- 
posits. The  check  columns  show  the  date  paid  and  the 
amounts  of  the  checks.  The  checks  are  entered  in  num- 
bered lines,  so  that  the  statement  readily  shows  how 
many  checks  are  paid  during  the  month.  The  model 
shows  forty-five  checks  charged;  hence  the  bank  book- 
keeper must  return  that  number  of  vouchers  (canceled 
checks). 

The  deposits  are  entered  in  a  column  to  the  right. 
These  entries  should  agree  with  the  entries  made  by  the 
teller  in  the  depositor's  pass  book.     (See  Form  15  C.) 

After  entering  all  checks  and  deposits  on  the  state- 
ment, the  bank  bookkeeper  enters  the  total  of  deposits  at 
the  foot  of  the  statement,  and  the  total  of  checks  below. 
The  difference  between  these  amounts  is  the  balance 
remaining  to  the  depositor's  credit. 

Bank  Drafts  (Form  15  H).  Persons,  in  transferring 
funds  from  one  city  to  another,  find  it  convenient  to  do 
so  by  remitting  bank  drafts.  Any  local  bank  will  sell  a 
draft  drawn  on  its  correspondent  bank,  payable  at  par  in 
any  part  of  the  country. 

The  form  illustrates  a  draft  drawn  by  a  bank  in 
North  Platte,  Nebr.,  on  a  bank  in  New  York  City.  This 
draft,  under  ordinary  conditions,  may  be  cashed  in  any 
city  in  the  United  States  at  par.  The  bank  cashing  it 
will  remit  it  to  New  York  for  credit.  Local  banks  sell 
drafts  on  banks  in  the  different  large  cities.  It  is  cus- 
tomary to  purchase  drafts  that  are  payable  in  the  large 
city  nearest  the  point  remitted  to. 

Persons  buying  bank  drafts  may  instruct  the  banker 
to  make  the  draft  payable  to  their  own  order  or  to  the 
order  of  the  person  to  whom  they  make  remittance.  It 
is  a  very  good  plan  to  have  the  draft  made  payable  to 


BUSINESS  PAPERS  89 

the  purchaser's  order.     In  that  case,  before  sending  it, 

the  purchaser  must  endorse  it.     The  form  of  endorsement 

to  use  is  shown  on  Form  15  F,  second  endorsement. 

Banks  charge  exchange  on  the  drafts  sold.     Rates 

differ,  but  are  based  on  the  amount  of  the  draft.     Many 

banks   charge   ten   cents   exchange    on    every    hundred 

dollars. 

».  Note. — Post  office  money  orders  and  express  orders  serve  the 
same  purpose  as  bank  drafts,  for  limited  amounts. 

Notes  Discounted  (Bank  Form  151).  Business  men, 
when  temporarily  in  need  of  funds,  regularly  apply  to 
their  banker  for  loans  or  discounts.  It  is  a  principal 
service  of  a  bank  to  loan  money  to  those  whose  credit  is 
good.  When  taking  a  loan  or  discount,  the  borrower  de- 
livers a  note  payable  to  the  bank. 

The  form  illustrates  a  note  given  to  a  certain  bank. 
The  note  does  not  draw  interest  until  after  maturity,  the 
form  indicating  that  the  payment  for  the  use  of  the 
money  from  date  of  maturity  is  in  the  form  of  a 
discount  deducted  from  the  amount  that  the  banker 
passes  to  the  borrower.  Assuming  that  the  interest  for 
sixty  days  is  $20,  the  banker  would  discount  the  note 
by  deducting  $20  from  the  face,  and  pass  $1980  to  the 
customer.  At  the  end  of  sixty  days  the  customer  would 
pay  $2000  in  settlement. 

If  the  interest  clause  in  the  note  read  "with  interest 
from  date,"  instead  of  "with  interest  from  maturity/ ' 
the  form  of  the  note  would  indicate  a  loan.  In  that 
case,  the  customer  would  receive  full  face  when  the  note 
was  delivered,  and  pay  face,  plus  interest,  at  maturity. 

Discount  Ticket  (Form  15  L).  When  depositors  dis- 
count their  customers'  notes  and  acceptances  at  a  bank,  a 
discount  ticket  is  used.  The  items  should  be  entered  so 
as  to  show  amounts  and  net  proceeds,  as  illustrated  in 
the  form. 

Certificate  of  Deposit  (Form  15  J) .  Occasions  arise 
when  it  is  desirable  to  leave  a  certain  amount  of  money 
on  deposit,  not  subject  to  check,  but  withdrawable  in  one 


90  RULES 

amount  by  the  depositor,  or  on  his  order.  When  money 
is  left  in  this  way,  it  is  customary  for  the  banker  to  issue 
to  the  depositor  a  Certificate  of  Deposit. 

The  form  illustrates  a  certificate  of  deposit  issued  by 
a  certain  bank  to  Henry  S.  Miller,  who  may  return  it 
with  endorsement,  and  receive  the  amount  stated,  or  he 
may  endorse  the  certificate  to  another  person,  who  can 
cash  it. 

Certified  Check  (Form  15  K).  The  payee  of  a  check 
sometimes  demands  special  assurance  that  the  check  will 
be  paid  when  presented  to  the  bank.  This  assurance  may 
be  given  by  having  the  check  certified  by  .the  banker.  The 
form  illustrates  a  Certified  Check.  This  check  has  been 
presented  to  the  bank  teller,  who  has  written  across  the 
face  a  certification  obligating  the  bank  to  pay  the  check 
whenever  properly  presented. 

63.  Forms  Used  in  Buying  and  Selling : 

The  Order  Blank  (Form  15  N)  is  a  form  used  by 
dealers  in  ordering  goods.  A  book  of  order  blanks 
should  contain  duplicates  as  well  as  original  orders. 
When  the- original  is  sent,  the  duplicate  is  kept  for  refer- 
ence, as  a  reminder  in  case  the  order  is  not  filled 
promptly;  and  later,  to  be  compared  with  the  goods 
received.  Order  blanks  should  be  numbered  consecu- 
tively as  a  means  of  ready  reference  in  correspondence. 

An  Invoice,  or  Bill  (Form  15  0)  is  sent  by  the 
seller  to  the  buyer  at  the  time  an  order  for  goods  is 
filled.  On  it  are  listed  the  items  sold,  the  prices  and 
the  amount.  On  the  form  are  written  the  customer's 
ledger  page  (for  the  convenience  of  the  seller),  the  route 
by  which  the  shipment  was  made,  and  the  terms.  The 
buyer,  on  receiving  an  invoice,  should  check  the  items 
carefully  with  the  goods  received,  and  compare  with  his 
order  to  note  discrepancies  in  articles,  quantity,  or  errors 
in  prices  or  extensions. 

64.  Forms  Used  in  Shipping: 

Bill  of  Lading  (Form  15  V).  When  a  shipper  de- 
livers goods  to  a  carrier  for  shipment,  he  usually  brings 


BUSINESS  PAPERS  9i 

a  shipping  book,  or  a  set  of  loose  sheets,  describing  the 
shipment  in  triplicate.  The  printed  matter  is  different 
on  each  of  the  three  sheets,  but  the  blank  spaces  to  be 
filled  in  by  the  shipper  are  the  same  in  each  form,  so 
that  the  set  may  be  completed  in  one  writing  by  using 
carbon  sheets. 

A  bill  of  lading  form  to  be  used  by  all  common  car- 
riers has  been  prescribed  by  the  Interstate  Commerce 
Commission.  The  original  copy  is  a  shipping  order  that  is 
kept  by  the  transportation  company.  The  two  duplicates 
are  signed  by  the  agent  of  the  transportation  company, 
the  first  being  a  bill  of  lading  which  is  sent  to  the  con- 
signee, and  the  second  being  a  memorandum  of  the  bill  of 
lading  which  is  kept  by  the  shipper. 

The  form  represents  a  set  of  shipping  bills  filled  out 
by  Cyrus  Martin,  the  signature  of  the  transportation 
agent,  A.  H.  Hooper,  being  written  on  the  bill  of  lading 
and  memorandum. 

65.     Forms  Used  in  Settling  Obligations: 

A  Statement  of  Account  (Form  15  P)  is  usually  ren- 
dered to  the  customer  on  the  first  of  the  month,  from  the 
ledger  account.  The  form,  a  statement  for  December, 
shows  a  balance  of  $250.19  carried  over  from  November. 
To  this  are  added  the  sales  made  to  the  customer  during 
the  month  closed,  the  total  debit  being  carried  to  the  sec- 
ond column.  Below  are  entered  the  customer's  credits 
as  they  appear  in  the  account,  the  total  credits  being  also 
carried  to  the  second  column,  where  they  are  subtracted 
from  the  debit  total,  showing  $493.14,  the  amount  due. 

The  receipt  at  the  bottom  of  the  statement,  written 
on  a  subsequent  date,  shows  that  the  customer  made  full 
payment  on  Jan.  9. 

An  Account  Sales  (Form  15  Q)  is  a  statement  or  re- 
port sent  by  the  commission  firm  to  the  consignor  of  goods 
sent  for  sale  on  the  market.  The  commission  firm  under- 
takes to  sell  at  market  prices  goods,  consigned  to  it,  and 
to  remit  to  the  consignor  the  proceeds  from  the  sales 


92  RULES 

after  taking  out  different  charges  for  services  in  effecting 
the  sales. 

The  form  shows  that  forty-nine  barrels  of  cranberries 
have  been  sold  for  the  consignor  in  four  lots  amounting 
in  all  to  $278.40.  The  commission  merchants'  charges  are 
entered  in  detail,  amounting  to  $24.89,  leaving  $253.51, 
net  proceeds,  due  the  consignor. 

Receipts  (Form  15  R) .  The  model  shows  that  Camp- 
bell &  Crane,  being  indebted  to  T.  M.  Carpenter, 
have  paid  the  debt,  and  that  Mr.  Carpenter  acknowl- 
edges this  payment.  The  form  shows  the  receipt,  with 
the  accompanying  stub,  before  the  receipt  is  removed 
from  Mr.  Carpenter's  receipt  book. 

That  portion  of  the  form  to  the  left  of  the  receipt  is 
called  the  "stub."  It  supplies  the  maker  of  the  receipt 
with  a  record  of  the  date,  amount,  to  whom  given,  and 
purpose  of  the  receipt.  At  the  time  of  writing  a  receipt, 
always  fill  out  the  stub  before  removing  the  receipt  from 
the  book. 

Note.— A  receipt  form  like  the  one  illustrated  is  frequently 
unnecessary.  In  Form  15  P,  the  payment  of  the  account  is  re- 
ceipted on  the  statement.  Invoices  (see  Form  15  O)  are  often 
receipted  in  like  manner.  A  check  returned  from  the  bank  with 
the  endorsement  of  the  payee  is  a  receipt  for  the  amount  of  the 
check,  although  not  a  receipt  for  the  payment  of  a  specified 
obligation. 

A  Promissory  Note  (Form  15  S)  is  a  written  promise 
to  pay  a  stated  sum  of  money  at  a  specified  time. 

The  original  parties  to  a  note  are  the  Maker,  or  party 
who,  by  the  act  of  signing  the  note,  makes  the  promise; 
and  the  Payee,  or  the  party  to  whom  the  note  is  made 
payable.  In  business,  notes  are  usually  made  payable  at 
a  bank  which  is  specified  in  the  note.  In  the  absence  of 
such  specification,  the  law  makes  a  note  payable  at  the 
legal  residence  of  the  maker. 

The  form  illustrates  a  promissory  note  and  its  stub 
properly  filled  out.  In  entering  the  amount  on  a  note  the 
same  care  should  be  observed  to  prevent  " raising"  or 
other  alteration  as  in  the  case  of  a  check. 


BUSINESS  PAPERS  98 

Drafts  (Form  15  T-U)  are  used  to  adjust  accounts 
without  the  transmission  of  money.  If  J.  C.  Rogers 
owes  the  student  $75,  and  H.  C.  Preston  owes  J. 
C.  Rogers,  the  latter  firm  can  draw  on  Preston  payable 
to  the  Student,  and  the  payment  of  this  draft  will  adjust 
the  several  accounts.  When  the  draft  is  made  payable 
at  sight  or  on  demand,  the  drawee  is  expected  to  pay  the 
draft  when  first  presented. 

Form  15  T  is  a  draft  drawn  at  thirty  days  sight, 
meaning  thirty  days  after  presentation.  It  should  be  pre- 
sented to  Preston  as  soon  as  possible,  for  acceptance. 
To  accept  this  draft,  Preston  should  write  across  the  face 
of  the  draft  the  word  "  Accepted/ '  the  current  date,  and 
his  signature.  The  draft,  after  Preston  has  accepted  it, 
is  called  an  acceptance.     (See  Form  15  U.) 

Commercial  drafts  are  commonly  used  as  a  means  of 
•making  collections  from  distant  firms  through  the  agency 
of  a  bank.  In  this  case,  the  drawer  makes  out  the  draft 
payable  to  the  order  of  "Myself,"  or  "Ourselves,"  and 
endorses  the  draft  in  favor  of  the  bank  "for  collection," 
or  he  makes  the  draft  payable  directly  to  the  collecting 
bank,  which  forwards  it  for  payment  or  acceptance. 

Goods  are  often  paid  for  with  the  buyer's  acceptance 
at  the  time  of  purchase,  the  acceptance  in  such  case  being 
used  in  place  of  a  promissory  note  and  entered  in  the 
same  way. 

If,  upon  the  presentation  of  a  draft,  the  drawee 
declines  either  to  pay  it  or  accept  it,  the  draft  is  said  to 
be  dishonored.  In  the  case  of  a  refusal  to  pay  an  ac- 
ceptance it  should  at  once  be  protested,  as  in  the  case  of 
a  refusal  to  pay  a  promissory  note. 

Form  16  L  illustrates  the  matter  written  on  pro- 
tested paper,  a  note  or  draft  being  protested  in  the  same 
manner  as  a  check.  Forms  16  M-N  illustrate  the  papers 
written  and  sent  out  at  the  time  of  protest. 

66.  Forms  Connected  with  Real  Estate.  Contracts 
relating  to  houses  and  lands  are  more  formal  than  those 
relating  to  personal  property.     Real  property  continues 


94  RULES 

perpetually.  In  the  course  of  years  many  different  per- 
sons become  interested  in  it  either  as  successive  owners 
or  as  having  rights  in  it.  The  rights  of  different  persons 
in  the  same  property  often  would  be  confused  if  all  trans- 
fers were  not  clearly  made  and  recorded  in  the  county 
records  as  a  notice  to  the  public.  Common  forms  relat- 
ing to  real  estate  are  here  referred  to. 

Deed  (Form  16  A) .  In  business  language,  a  deed  is 
a  conveyance  of  land.  (In  law,  a  deed  is  any  instrument 
written  under  seal.)  The  usual  conveyances  of  real  prop- 
erty are  made  by  "warranty"  deed  or  "quit  claim' ' 
deed:  in  the  one,  the  grantor  guarantees  good  title;  in 
the  other,  the  grantor  merely  relinquishes  his  rights  in 
the  property. 

In  the  model  form  James  P.  Herbert  conveys  by  war- 
ranty deed  to  John  Manning  the  property  described.  The 
signature  of  the  grantor  is  certified  to  by  a  notary  pub- 
lic, a  public  official  authorized  to  certify  as  to  the 
genuineness  of  documents. 

Mortgage  (Form  16  B).  In  the  model  form  the 
grantors,  James  B.  and  Mary  Long,  convey  to  John  Man- 
ning their  interest  in  the  described  property  subject  to 
the  condition  that  if  the  grantors  pay  the  four  notes 
named  in  the  mortgage,  the  conveyance  shall  be  void. 
Mortgages  are  also  acknowledged  in  the  same  form  as 
deeds. 

Lease  (Form  16  C).  A  lease  is  a  contract  between 
the  owner  of  property  and  the  tenant,  permitting  the  lat- 
ter to  occupy  the  property  a  stated  time  for  a  stated  com- 
pensation. In  the  model  form  the  owner,  or  landlord,  is 
the  Coleman  Real  Estate  Co.,  and  the  tenant,  John 
Manning. 

Contract  of  Sale  (Form  16  0).  It  is  quite  common 
for  persons  to  buy  real  property  on  installment  pay- 
ments, the  title  not  to  pass  until  certain  payments  are 
made.  This  agreement  is  evidenced  by  a  Contract  of 
Sale.  In  the  model,  the  owner,  A.  H.  Avery,  agrees  to 
grant  D.  B.  Isaacs  a  deed  to  the  described  property  after 


BUSINESS  PAPERS  95 

certain  payments  are  made.     On  the  back  (Form  16  P) 
is  space  for  recording  the  payments  as  made. 

67.  Formal  Papers  Connected  with  Personal  Prop- 
erty. Contracts  or  conveyances  of  personal  property  of 
special  importance  may  be  evidenced  by  more  formal 
documents  than  those  referred  to  in  Prin.  63.  Forms  fre- 
quently met  with  are  mentioned. 

Bill  of  Sale  (Form  16  D).  This  is  a  conveyance  of 
personal  property  in  suitable  form  for  public  record. 
John  Manning  sells  his  business  property  and  good  will 
to  William  A.  Goodwin. 

Chattel  Mortgage  (Form  16  G).  This  is  a  convey- 
ance of  the  grantor's  interest  in  personal  property  sub- 
ject to  a  condition  which,  if  fulfilled,  will  void  the  instru- 
ment. Care  should  be  used  to  describe  personal  property 
in  such  a  way  as  to  clearly  identify  it. 

Insurance  Policy  (Form  16  I).  The  risks  of  fire  loss, 
and  other  losses  due  to  natural  causes  or  risks  incurred, 
are  carried  in  a  large  measure  by  insurance  companies 
for  a  stipulated  premium.  In  the  model  form  the  Com- 
mercial Insurance  Co.,  the  insurer,  agrees  to  make  good 
to  D.  C.  Bennett,  the  insured,  fire  losses  in  the  property 
of  the  latter  to  the  extent  of  $4,000.  The  insured  has 
paid  the  company  a  premium  of  $40  for  assuming  this 
risk. 

68.  Papers  Relating  to  Proprietorship.  An  indi- 
vidual enters  into  no  written  contract  when  opening  a 
business,  since  it  is  his  personal  concern,  and  his  rights 
in  the  business  are  not  shared  by  others.  A  partnership 
is  an  association  of  two  or  more  persons  whose  business 
relations  should  be^  clearly  defined  in  a  written  agree- 
ment. In  a  corporation,  the  relations  of  the  owners  are 
regulated  by  agreements  in  a  number  of  papers. 

Agreement  of  Co-partnership  (Form  16  H).  On 
forming  a  partnership,  the  terms  and  conditions  are  writ- 
ten in  a  form  similar  to  the  model.  As  therein  stated, 
Manning  and  Finney  agree  as  to  the  investments,  sal- 


96  RULES 

aries,  and  division  of  profits  of  each,  the  time  the  partner- 
ship is  to  continue,  and  other  matters.  A  copy  of  this 
agreement  should  be  kept  by  each  partner. 

Agreement  of  Incorporation  (Form  16  R).  In  this 
form  are  written  the  general  agreements  between  the  per- 
sons who  are  about  to  organize  a  corporation. 

Articles  of  Incorporation  (Form  16  T).  In  this  form 
are  set  forth  the  general  rules  and  conditions  governing 
the  corporation  during  its  period  of  existence.  This,  as 
the  preceding  form,  is  signed  by  the  incorporators. 

State  Certificate  of  Incorporation  (Form  16  S).  This 
form  is  issued  to  the  corporation  by  the  state,  and  is  evi- 
dence of  the  power  of  the  corporation  to  do  certain  speci- 
fied business  acts  as  a  person. 

Certificate  of  Stock  (Form  15  W).  This  form  is  is- 
sued by  the  corporation  to  the  share  holders,  and  is  evi- 
dence of  the  holder's  proprietorship  interest  in  the 
concern.  In  the  model  referred  to,  a  certificate  of 
stock  is  issued  to  a  stock  holder,  Martin  Goldman, 
by  the  American  Steel  Corporation,  as  evidence 
that  Mr.  Goldman  owns  fifty  shares  of  the  capital 
stock  of  that  company.  To  the  left  is  the  stub,  on 
which  are  recorded  the  essential  facts  about  its  issuance, 
and  at  the  bottom  Mr.  Goldman's  receipt  for  the  certi- 
ficate. In  this  instance,  the  shares,  now  in  possession  of 
Mr.  Goldman,  were  owrfed  by  H.  B.  Rogers,  who  sold  the 
stock  to  Mr.  Goldman.  When  one  shareholder  transfers 
his  shares  to  another,  it  is  generally  necessary  for  the 
seller  of  the  shares  to  surrender  his  certificate  to  the 
company.  The  company  then  issues  a  new  certificate  to 
the  buyer  of  the  shares.  This  is  called  a  transfer  "on 
the  books"  of  the  corporation. 

69.  Filing.  All  business  papers  .that  have  value  as 
vouchers  should  be  filed  for  possible  future  reference. 

A  Filing  System  should  be  adopted  with  a  view  to 
several  considerations,  some  of  which  are  frequently 
overlooked.     It  should  be  such  that   (1)  papers  may  be 


BUSINESS  PAPERS  97 

quickly  and  easily  filed;  (2)  that  they  may  be  quickly 
and  easily  located;  (3)  the  whole  scheme  should  be  on  a 
plan  to  permit  of  expansion  for  future  needs,  without 
disarrangement  of  present  methods. 

The  easiest  way  to  take  care  of  vouchers  is  to  number 
them  serially  from  the  record  books,  and  file  them  by 
number.  However,  there  is  a  very  good  reason  for  not 
filing  invoices  by  number,  although  they  are  referred  to 
by  number.  Most  business  men  find  it  better  to  have  all 
invoices  from  a  given  firm  in  one  binder  or  folder,  so  that 
comparison  of  past  prices,  terms,  etc.,  can  be  made. 

All  entries  to  Expense  should  be  explained  by  some 
bill,  receipt,  or  ticket.  These  can  very  well  be  given  ex- 
pense voucher  numbers  from  the  books  of  entry,  and  filed 
in  numerical  order. 

Cancelled  checks  may  be  called  for,  months,  or  even 
years,  after  they  have  been  returned  by  the  bank.  It  is 
advisable  to  assort  them  also  by  number,  when  they  are 
returned  by  the  bank,  and  file  them  away  in  this  order. 

It  is  a  good  practice  to  file  all  vouchers  in  their 
places  at  the  close  of  the  day. 


CHAPTER  XI 

THE  JOURNAL— ORIGINAL  ENTRIES 

71.  Original  Entries  are  those  made  at  the  time  of 
the  transaction,  and  comprise  the  basis  for  the  transferred 
entries,  which  later  appear  in  the  ledger  acconnts. 

There  are  two  important  phases  of  the  original  en- 
try: (1)  the  record  of  the  facts  about  the  transaction; 
(2)  the  record  of  the  accounts  affected  by  the  trans- 
action. The  record  of  the  facts  is  naturally  first.  It 
should  be  a  complete  record,  giving  the  essentials  in  such 
a  way  as  to  make  subsequent  explanation  unnecessary. 

A  statement  of  the  transaction  may  be  written  in 
full  in  the  Journal,  thus : 

(Date)  Bot.  of  Henry  Gardner  on  account 

20  brl.  Flour  .  @     $10.00        $200.00 

10  sk.  Buck  Wheat      <®        1.90  19.00 


$219.00 
In  the  ordinary  transactions  of  business,  a  voucher 
of  this  transaction  usually  passes  hands.  Invoices,  re- 
ceipts, notes,  drafts,  checks,  etc.,  are  vouchers  of  business 
transactions.  In  the  above  transaction,  if  an  invoice  was 
received  with  the  flour,  the  invoice  should  be  preserved 
as  a  voucher  of  the  transaction.  With  the  voucher  to 
refer  to,  the  entry  could  be  abbreviated,  thus : 

(Date)   Bot.  of  Henry  Gardner  on  account 

Mdse.  per  invoice  No.  1 $219.00 

The  record  of  a  business  transaction  includes  proper 
filing  of  the  voucher  supporting  the  entry.  When  the 
facts  are  recorded,  the  next  step  is  to  determine  and 
enter,  for  the  purpose  of  posting,  the  titles  of  the  ac- 
counts affected  by  the  transaction. 

In  the  above  transaction,  with  the  facts  before  him, 
the  bookkeeper  indicates  the  account  to  be  debited  by 
placing  the  debit  account  name  to  the  left  and  the  credit 

98 


THE  JOURNAL— ORIGINAL  ENTRIES  99 

account  name  to  the  right,  and  likewise  the  debit  and 
credit  amounts  in  the  left  and  right  money  columns, 
thus: 

(Date)   Bot.  of  Henry  Gardner  on  account 

Mdse.  per  invoice  No.  1 $219.00 

Mdse.  Purchases   219.00 

Henry  Gardner 219.00 

In  a  business  having  numerous  account  subdivisions, 
the  account  to  debit  or  to  credit  in  a  given  transaction, 
may  be  in  doubt,  and  often  the  matter  cannot  be  decided 
at  the  moment.  With  a  correct  original  record  of  the 
facts,  the  posting  titles  can  be  entered  at  any  time  before 
the  posting  is  done. 

For  many  years,  the  Day  Book  was  used  to  contain 
all  records  of  the  facts  about  transactions,  and  the  Jour- 
nal was  used  to  show  the  posting  titles  and  amounts. 
These  two  books,  in  more  recent  bookkeeping,  have  been 
combined  into  one  book,  retaining  the  name  Journal.  But 
the  latter  book  is  not  used  now  to  contain  all  original 
entries  of  a  business  except  under  very  simple  business 
conditions.  In  the  average  office,  it  contains  such  entries 
as  other  books  of  original  entry  cannot  properly  explain 
and  classify. 

However,  it  is  possible  to  make  every  entry  in  jour- 
nal form,  and  the  journal  form  of  an  entry  is  the  one 
used  in  discussing  the  account  analysis  of  any 
transaction. 

71  B.  The  ordinary  routine  entries  of  a  business  are 
made  to  the  best  advantage  in  a  number  of  books,  inter- 
mediate between  journal  and  ledger,  and  containing  some 
of  the  elements  of  both. 

The  first  of  these  is  the  Cash  Book,  which  contains 
original  entries  of  cash  receipts  and  payments,  in  more 
compact  order  than  if  they  were  spread  upon  a  journal, 
while  at  the  same  time,  it  is  so  arranged  as  to  exhibit  the 
cash  balance  without  posting  to  the  ledger.  (See  Forms 
10  B,  13  B,  etc.) 

The  Sales  Book  is  probably  next  in  importance 
among  the  books  intermediate  in  function  between  jour- 


100  -     RULES 

nal  and  ledger.  This  book  gives  a  consecutive  record  of 
sales  in  form  to  be  added  to  find  the  entire  sales  without 
posting,  item  by  item,  to  the  credit  of  a  Sales  account  in 
the  ledger.     (See  Form  13  C.) 

The  Purchases  Book  (Form  13  D),  the  Bill  Book 
(Form  13  M),  the  Inventory  Book  (Form  14N-P),  and 
many  other  books  applying  especially  to  certain  lines  of 
business,  take  the  place  of  the  journal,  for  original  en- 
tries, while  they  relieve  the  ledger  of  more  or  less  details. 

The  original  entry,  then,  is  the  first  record  of  a 
transaction  in  the  journal  or  other  book  designed  for 
first  entries  of  a  given  class.  The  original  entry  should 
either  give  all  essential  facts  of  the  transaction,  or  else 
refer  to  accessible  vouchers  giving  the  essential  facts. 

71  C.  Reliable  Original  Entries.  Bookkeeping  rec- 
ords serve  to  explain  the  financial  obligations  between  a 
given  business  concern  and  other  persons  or  concerns, 
between  the  members  of  the  same  concern,  and  also  to 
explain  the  business  operations. 

The  adjustment  of  differences  between  a  concern 
and  outside  people,  or  between  its  several  members,  may 
carry  with  it  disputes  that  must  be  settled  in  a  court  of 
law.  The  amounts  of  such  settlements  depend  largely  on 
the  records  kept  by  the  parties  to  the  dispute.  Account 
books  submitted  in  court  as  evidence,  are  accepted,  as  a 
rule,  if  they  comply  with  certain  established  rules  con- 
sidered essential  to  a  good  record.  If  they  do  not  com- 
ply with  those  rules,  the  books  may  be,  and  generally  are, 
given  no  consideration. 

A  good  set  of  books  will  be  found  to  show  evidence 
that  the  entries  are  complete  (Prin.  71 D),  systematic 
(71 E),  reliable   (71 F),  and  promptly  recorded   (71  G). 

71 D.  Complete  Entries.  The  books  must  exhibit 
evidence  that  they  contain  all  the  records  of  a  given 
kind,  entered  according  to  a  definite  method  and  order. 
The  accuracy  of  other  records  in  the  same  books  not 
bearing  on  the  particular  matter  in  dispute,  has  a  bearing 
on  the  credibility  of  the  records  as  a  whole.    The  appear- 


THE  JOURNAL— ORIGINAL  ENTRIES  101 

ance  of  any  slackness  in  making  records  in  any  part  of 
the  books,  tends  to  destroy  the  entire  record  as  evidence. 
Completeness  should  also  extend  to  a  statement  of  all 
the  essential  facts  in  every  entry  of  every  transaction. 
There  should  be  no  need  to  guess  at  the  meaning  of  an 
entry. 

71 E.  Systematic  Entries.  There  must  be  a  well 
defined  system  for  making  entries.  Varying  styles  of 
entry,  or  even  variation  in  the  style  of  writing,  tend 
to  cast  doubt  upon  a  set  of  books.  These  should  show 
that  all  entries  of  the  same  kind  follow  the  same  general 
routine  of  entry. 

Any  kind  of  books,  whether  bound,  or  loose-leaf,  or 
even  cards,  or  other  devices,  are  admissible,  provided 
they  show  all  reasonable  safeguards  against  inaccuracy. 

71 F.  Reliable  Entries.  A  set  of  books  should 
show  the  straightforward,  open  record  of  one  who  is 
accustomed  to  write  facts,  and  to  record  them  just 
as  they  are.  Erasures  and  alterations  show  uncertainty. 
Any  mistakes  made  in  books  are  especially  damaging, 
if  they  are  either  wholly  or  partially  concealed. 

The  best  kept  books  may  'show  some  errors,  but 
when  an  error  is  discovered  in  an  original  entry,  it 
should  be  plainly  marked,  "  error, "  and  the  correction 
for  it  should  be  also  plainly  marked  as  a  "correction." 

71 G.  Prompt  Entries.  The  books  should  show 
that  all  records  of  transactions  were  made  while  the 
facts  were  fresh  in  mind.  It  should  be  kept  in  view 
that  the  purpose  of  books  is  to  carry  a  great  mass  of 
business  facts,  as  a  relief  to  the  mind.  To  carry  in 
memory,  any  longer  than  necessary,  things  that  require 
entry  in  the  books,  is  certainly  a  bad  method. 

71 H.  Ruling  in  Books  of  Original  Entry.  Books 
of  original  entry  are  ruled  in  a  variety  of  ways  to  suit 
different  kinds  of  entries.  The  ruling  should  afford 
convenient  spaces  for  the  following  elements  of  record, 
essential  to  every  entry: 


102  RULES 

(1).    Date  of  the  transaction. 

(2).     Persons  with  whom  the  firm  has  transactions. 

(3).     Details  of  the  transaction. 

(4)._  The  ledger  accounts  affected  by  the  trans- 
action. 

(5).     The  amounts. 

(6).     Posting  of  the  amounts  to  the  accounts. 

All  of  these  points  should  appear  in  every  original 
entry  that  may  involve  some  future  dispute. 

A  place  for  each  of  these  points  in  a  record  is  gen- 
erally provided,  in  books  of  original  entry,  by  vertical 
columns  separated  by  vertically  ruled  lines.  Thus  we 
have  the  "date  column,"  the  "explanation  column,' ' 
the  "account  column,"  the  "posting  column,"  the 
"money  column."  etc.  The  order  and  arrangement  of 
these  columns  are  open  to  the  preference  of  the  book- 
keeper, and  are  determined  by  the  following  considera- 
tions : 

(1).     Convenience  in  making  original  entries. 

(2).     Convenience  in  posting. 

(3).     Convenience  for  future  reference. 

A  change  in  arrangement  of  columns  in  books  of 
original  entry  has  often  increased  the  efficiency  of  a  book- 
keeper. To  reduce  the  daily  entry  and  posting  time  by 
one  hour,  should  increase  the  efficiency  of  a  bookkeeper 
something  like  fourteen  per  cent. 

The  following  points  in  arrangement  of  books  of 
original  entry  have  aided  the  author  to  keep  books  ef- 
fectively. Although  they  are  not  uniformly  followed  by 
other  authors  and  accountants,  it  will  be  found  that  prac- 
tical forms  sold  in  stationery  stores  agree  very  generally 
with  reference  to  the  following  matters  of  arrangement: 

(1)  The  date  should  be  at  the  extreme  left  in  all 
books  of  original  entry.  This  enables  one  to  look  at  one 
place  for  the  date  whatever  book  is  used. 

(2)  The  memoranda  should  follow  the  dates.  By 
memoranda  is  meant  the  general  explanation  of  the 
nature  of  the  entry. 

(3)  The  account  names  should  follow  the  memo- 
randa.    There   are  two  reasons  for  this:     The  account 


THE  JOURNAI^— ORIGINAL  ENTRIES  103 

classification  is  derived  from  the  memoranda ;  the  ac- 
count names,  if  placed  as  near  the  amounts  to  be  posted 
as  possible,  cause  less  eye  strain  in  glancing  at  the  entries 
when  posting  than  would  be  the  case  if  the  account 
names  and  the  amounts,  were  separated  by  memoranda 
which  is  not  essential  to  posting. 

(4)  The  account  names  should  be  followed  by  the 
column  for  post  marks.  This  places  the  post  mark  be- 
tween the  account  name  and  the  amount. 

,  (5)  The  amount  columns  should  come  last  and  to 
the  right.  A  book  of  original  entry  will  lie  on  the  table 
to  the  left  of  the  ledger  at  posting  time,  and  by  having 
account  names,  post  marks  and  amounts  together,  and  as 
close  to  the  ledger  as  possible,  the  motions  of  the  eyes 
and  hand  are  reduced  to  the  minimum. 

711.  Reading  Amounts.  Bookkeepers  are  fre- 
quently at  a  loss  to  read  amounts  so  as  to  be  quickly  and 
easily  understood  by  the  one  to  whom  read.  In  offices 
where  oral  reading  is  required,  a  system  for  calling  off 
the  numbers  is  necessary  in  order  to  facilitate  work.  This 
system  may  be  learned  in  five  minutes,  resulting  in  fully 
five  minutes  saved  in  every  hour's  reading. 

To  read  amounts,  divide  dollars  into  parts  of  three 
figures  each,  beginning  at  the  decimal  point,  and  read 
the  cents  separately;  thus  $56947.83  would  be  divided 
56-947-83  and  read  "  fifty-six,  nine  forty-seven,  eighty- 
three.  "  The  following  amounts  with  the  manner  of 
reading  them  orally  will  probably  answer  as  a  sugges- 
tion for  any  combination. 

$     129.58  One   twenty-nine,   fifty-eight. 

12900.58  Twelve,  nine  hundred  dollars,  fifty-eight 

12958.00  *  Twelve,  nine  fifty-eight  dollars. 

.58  Cents,  fifty-eight. 

.  1.03  One-O-three.    (The  word  "O"  is  more  easily  pronounced 

than  nought  or  ought.) 

700.20  Seven  hundred  dollars,  twenty. 

720.00  Seven  hundred  twenty. 

7.20  Seven,  twenty. 

24.00  Twenty-four. 

.24  Cents,  twenty-four. 

1308.07  One,  three- O-eight,  O-seven. 

259546.03  Two  fifty-nine,  five  forty-six,  O-three. 


CHAPTER  XII 

THE  JOURNAL— DEBIT   AND   CREDIT 

72.  General  Rule.  Debit  an  account  to  show  value 
passed  into  the  business  element  named  by  the  account;  credit 
an  account  to  show  value  passed  out  of  the  business  element 
named  in  the  account. 

This  rule  seems  as  comprehensive  and  true  to  con- 
ditions as  any  general  rule  that  the  author  has  seen ;  but 
in  order  to  direct  its  application,  some  discussion  of  the 
principles  underlying  it  seem  to  be  in  place. 

A  business  concern  is  made  up  of  a  number  of  con- 
stituent elements,  or  essential  parts,  which  are  involved 
in  operating  the  business.  Thus,  cash,  accounts  receiv- 
able and  payable,  property,  proprietorship,  trading,  ex- 
pense, interest,  etc.,  are  the  names  of  elements  entering 
into  the  business.  These  elements  are  discussed  at  length 
in  Prin.  1  to  60.  A  business  transaction  involves  value 
passing  into  one  or  more  of  the  business  elements  and 
passing  out  of  one  or  more  business  elements.  The  trans- 
fers of  value  are  indicated  by  debit  and  credit  entries  in 
the  journal. 

After  debits  and  credits  are  indicated,  the  entries 
are  posted  to  the  accounts  so  that  all  values  passed  into 
and  passed  out  of  a  given  element  may  be  found  listed  in 
the  debit  and  credit  columns  of  the  account.  The  account 
may  be  balanced.  A  debit  excess  shows  primarily  that 
more  value  has  passed  into  the  named  element  than  has 
passed  out  of  it ;  a  credit  excess  shows  the  reverse. 

The  bookkeeper  undertakes  to  indicate  by  debits  and 
credits  all  values  passing  into  and  out  of  all  named  ele- 
ments of  the  business.  The  transfer  of  values  occurs  in 
several  ways,  of  which  an  outline  is  here  given : 

(1)  By  investment:  value  passes  into  one  or  more 
property  elements  of  the  business  out  of  proprietorship. 

104 


THE  JOURNAL— DEBIT  AND  CREDIT  105 

(2)  By  buying:  value  passes  into  one  or  more 
property  or  service  elements  out  of  cash  or  obligations 
payable. 

(3)  By  selling:  value  passes  into  cash  or  obligations 
collectible  out  of  property,  services,  or  both. 

(4)  By  paying:  value  passes  into  obligations  pay- 
able out  of  cash. 

(5)  By  collecting:  value  passes  into  cash  out  of  ob- 
ligations collectible. 

(6)  By  gifts  received:  value  passes  into  one  or 
more  property  elements  of  the  business  out  of  donations. 

(7)  By  manufacturing:  value  passes  into  the  prod- 
uct manufactured  out  of  materials,  labor  and  expense. 

(8)  By  depreciation:  value  passes  into  the  element 
of  depreciation  out  of  the  element  of  property. 

(9)  By  appreciation:  value  passes  into  property  out 
of  the  element  of  rise  in  value. 

(10)  By  accident,  theft,  etc.:  value  passes  into  the 
element  of  chance  out  of  the  element  of  cash,  prop- 
erty, etc. 

It  will  be  seen  in  the  above  instances,  that  to  debit 
and  credit  transactions  properly,  one  must  have  in  mind 
the  elements  of  the  business,  or  at  least  be  able  to  recog- 
nize the  element  into  which  and  out  of  which  value  passes 
by  reason  of  transactions  or  circumstances. 

The  Cash  account,  and  all  property  accounts,  are  to 
be  debited  to  show  a  value  passed  into  the  named  ele- 
ment, and  credited  with  equal  value  passed  out.  Prop- 
erty other  than  cash,  when  purchased,  is  debited  at  cost 
and  when  sold  is  credited  at  cost.  The  difference  between 
cost  and  selling  price  of  property  is  attributed  to  some 
element  named  in  a  nominal  account.  Thus,  the  differ- 
ence between  the  cost  and  selling  price  of  merchandise 
is  attributed  to  the  operation  of  trading  and  the  amount 
of  the  difference  is  found  in  the  Trading  account.  The 
difference  between  the  value  passed  into  a  note  receivable 
and  the  amount  passed  out  of  it  when  collected,  is  attrib- 
uted to  interest,  and  is  credited  in  the  Interest  account. 


106  RULES 

The  nominal  accounts  show  the  causes  of  increase  or  de- 
crease in  property. 

But  the  result  of  increase  or  decrease  is  profit  or 
loss ;  so  when  it  is  not  considered  necessary  to  specify  the 
cause  in  a  nominal  account,  the  cause  is  not  mentioned, 
but  the  result  it  carried  directly  to  Profit  and  Loss.  It  is 
apparent,  however,  that  if  increase  or  decrease  in  the 
value  of  property  be  noted  in  the  account  at  the  time  of 
occurrence,  the  book  value  would  be  the  real  value,  which 
would  be  an  ideal  condition.  A  practical  approximation 
of  this  condition  is  accomplished  in  good  bookkeeping. 

Kesults  are  exhibited  in  two  ways  in  current 'book- 
keeping, which  for  the  sake  of  distinction  we  will  call  the 
earlier  method  and  the  later  method. 

In  the  earlier  method,  the  elements  of  the  business 
were  distinguished  in  a  somewhat  loose  way.  The  ac- 
counts were  debited  and  credited  from  the  transactions 
without  very  careful  attention  to  results;  until  at  the 
close  of  the  year,  a  review  of  the  entire  matter  was  made. 
At  that  time  an  inventory  or  appraisal  of  the  value  re- 
maining in  each  element  was  made,  the  account  was 
credited  with  its  estimated  value  as  passing  out  of  the 
given  year  into  the  next,  and  the  remainder  was  passed 
to  Profit  and  Loss.  Under  this  method  the  proprietor 
was  more  or  less  uncertain  as  to  the  results  during  the 
year,  or  until  the  books  were  closed ;  and  could  not  have 
very  effective  information  from  his  books  as  to  the  prog- 
ress of  the  business  day  by  day.  The  older  method  made 
free  use  of  the  mixed  account,  which  does  not  exhibit  a 
financial  result  until  inventory  time.  This  method  of 
keeping  accounts  was  the  occasion  of  many  business  fail- 
ures and  financial  difficulties  due  to  lack  of  current  infor- 
mation about  the  business. 

Under  the  later  method,  the  business  man  recognizes 
that  the  elements  of  the  business  can  be  distinguished  in 
such  a  way  as  to  make  a  closer  exhibit  of  results  continu- 
ously, or  at  least  at  stated  times  during  the  year. 
Especially  can  the  accounts  be  kept  so  as  not  to  cause 


THE  JOURNAL— DEBIT  AND  CREDIT  107 

overestimate  of  profits.  In  order  to  do  this,  mixed  ac- 
counts are  abandoned,  and  simple  accounts  are  substi- 
tuted. 

Four  financial  conditions  are  recognized  in  the  ac- 
counts— assets,  liabilities,  profits,  and  losses — and  the  ac- 
counts are  named  and  entries  are  made  so  as  to  hold  these 
accounts  as  nearly  as  practicable  to  a  current  exhibit  of 
the  conditions  mentioned.  In  order  to  do  this,  attention 
must  be  given  to  the  passage  of  value  out  of  property  ele- 
ments into  profit  or  loss  elements  at  the  time  the  passage 
occurs.  Thus,  by  the  older  method  the  sale  of  a  building 
for  $6000.00  cash  which  had  been  debited  in  the  Real 
Estate  account  at  $5000.00  would  be  entered  thus : 

Cash    6000.00 

Real  Estate    6000.00 

The  profit  from  the  sale  would  be  shown  at  the  end 
of  the  year  when  a  balance  would  be  carried  from  the 
Real  Estate  account  to  Profit  and  Loss. 

Under  the  later  method,  the  entry  would  be : 

Cash    6000.00 

Real   Estate    5000.00 

Profit    1000.00 

By  the  latter  entry  the  profit  is  apparent  on  the 
books  at  once  as  profit  instead  of  being  obscured  in  the 
property  account  until  the  end  of  the  accounting  period. 

The  recognition  of  depreciation  in  property  gives  oc- 
casion for  entries  which,  under  older  methods,  were  de- 
ferred or  neglected  with  the  result  that  the  business  man 
suffered  from  a  corresponding  uncertainty  as  to  his  in- 
come. Everything  made  by  hand  wears  or  wastes  away. 
A  house  may  last  fifty  years,  a  machine  ten,  a  tool  one. 
Whatever  the  life  of  the  property,  its  value  passes  out 
day  by  day  until  it  becomes  absolutely  unfit  for  the  pur- 
pose intended.  This  fact  is  recognized  in  bookkeeping 
by  estimating  the  value  passed  out  of  fixed  property  at 
regular  intervals  and  crediting  the  Property  account 
either  directly  or  in  a  subsidiary  Reserve  account.  Thus, 
on  the  assumption  that  a  machine  costing  $1000.00  de- 


108  KULES 

predates  in  value  10%  during  an  accounting  period,  an 
entry  would  be  made : 

Depreciation    100.00 

Reserve  for  Depreciation  on  Machine. .  100.00 

The  account  "Reserve  for  Depreciation"  is  simply  a 
device  for  crediting  value  passed  out  of  the  property 
without  writing  the  credit  entry  in  the  Property  account. 
In  considering  the  value  remaining  in  the  machine,  the 
credit  in  the  reserve  would  be  taken  from  the  debit  in  the 
property  account. 

The  depreciation  in  fixed  property  not  to  be  replaced 
is  shown  by  writing  off  a  certain  amount  periodically. 
Thus,  the  value  of  a  patent,  debited  at  $3000.00,  may  be 
found  to  pass  out  at  the  rate  of  $500.00  a  year.  In  that 
case  the  yearly  entry  would  be: 

Depreciation * 500.00 

Patent 500.00 

In  accounts  of  things  which  cannot  be  replaced,  the 
credit  for  diminishment  in  value  is  made  directly  in  the 
account  instead  of  in  a  reserve  for  the  account. 

In  the  case  of  floating  property — movable  things  that 
are  bought  and  sold  piecemeal  —  depreciation  is  not  a 
matter  of  debit  and  credit  entry.  Merchandise,  however, 
depreciates  as  well  as  anything  else;  but  the  deprecia- 
tion is  deducted  from  the  inventory  before  entry  in  the 
books. 

Value  passes  out  of  accounts  and  notes  receivable 
by  reason  of  inability  to  collect.  This  fact  is  recognized 
by  entry.  Thus,  John  Smith's  debit  of  $50  is  uncollect- 
ible.    Entry  is  made : 

Profit  and  Loss  50.00 

John  Smith   50.00 

Journal  entries  are  used  to  show  value  passed  into 
and  out  of  business  elements,  whether  the  passage  was 
occasioned  by  actual  transactions  between  persons  or  by 
conditions  affecting  property. 

Whatever  the  transaction,  the  student  may  deter- 
mine what  account  to  debit  and  what  to  credit  by  noting 
the  elements  into  which  and  out  of  which  value  has 
passed. 


THE  JOURN  AD— DEBIT  AND  CREDIT  109 

The  following  entries  will  serve  to  illustrate  debits 
and  credits  for  transactions  grouped  for  convenient  ref- 
erence under  entries  in  cash  accounts  (Prin.  72  A) ; 
entries  in  accounts  of  cash  receivable  (Prin.  72  B)  ;  entries 
in  accounts  of  cash  payable  (Prin.  72  C)  ;  entries  in  ac- 
counts of  assets  not  cash  or  cash  receivable  (Prin.  72  D)  ; 
entries  in  accounts  of  profit  or  gain  (Prin.  72  E)  ;  entries 
in  accounts  of  loss  (Prin.  72  F)  ;  entries  to  readjust  ac- 
counts (Prin.  72  G)  ;  entries  to  close  the  books  (Prin. 
72  H). 

72  A.  Entries  in  Cash  Accounts.  The  Cash  accounts 
are  carried  in  an  account  of  general  money,  headed, 
Cash ;  and  in  current  cash  funds  kept  for  special  purposes 
as  Cashier's  Fund,  Traveling  Expense  Fund,  etc. 

Examples : 

(1) 

James  Good  began  business  with 

tasb  invested  $1000.00. 
Cash  Dr.  (Value  passed  into  an  asset) 1000.00 

James    Good,    Capital,    Cr.    (Value   passed 

out  of  proprietorship)    1000.00 

(2) 

Paid  cash  $25  for  rent  of  store  on  month. 
Expense  Dr.   (Value  passed  into  operations)...       25.00 

Cash  Cr.  (Value  passed  out  of  an  asset) . .  25.00 

(3) 

Set  aside  $50  in  a  cashier's  fund  for  petty 
cash  payments. 
Cashier  Fund  Dr.  (Value  passed  into  an  asset)       50.00 

Cash  Cr.  (Value  passed  out  of  an  asset) . .  50.00 

(4) 

Sold  H.  C.  Hoover  for  cash 

10  bbl.  Flour  @  $11.00 110.00 

Cash  Dr.   (Value  passed  into  an  asset) . .  110.00 

Mdse.    Sales   Cr.    (Value   passed   out 
of  trading  operations) 110.00 

(5) 

Bot.  of  Greely  &  Co.  for  cash 

Mdse.  per  Inv.  No.  1 $625.00 

Mdse.    Purchases   Dr.    (Value   passed    into 

trading  operations)    625.00 

Cash  Cr.    (Value  passed  out  of  an  asset)  625.00 

72  B.     Entries  in  Accounts  of  Cash  Receivable.  These 

accounts  include  customers'  accounts  under  the  debtors' 


110  RULES 

names  or  considered  collectively  under  the  heading  Ac- 
counts Receivable,  Notes  Receivable,  Bonds  Receivable, 
and  Mortgages  Receivable,  or  other  claims  for  definite 
amounts  of  money  to  be  -collected  immediately  or  in  the 
future. 

v  Examples: 

(6) 
Sold  H.  Bell  on  account 

5  bbl.  Flour  @  $11.00 55.00 

H.  Ben  Dr.  (Value  passed  into  an  asset) ...  55.00 

Mdse.   Sales  Cr.    (Value  passed  out  of 
operations)     55.00 

(7) 

Received  from  H.  Bell  $25.00  cash  on  account. 

Cash  Dr.  (Value  passed  into  an  asset) 25.00 

H.  Bell  Cr.  (Value  passed  out  of  an  asset) 25.00 

(8) 

Sold  P.  D.  Fisher  for  30-day  note 

6  tons  hay  @  $18.00 $108.00 

Notes  Receivable  Dr.   (Value  passed  into 

an  asset) 108.00 

Mdse.  Sales  Cr.  (Value  passed  out  of 

operations)     108.00 

(9) 

Received  Cash  $50  from  P.  B.  Fisher  to  apply  on  note  against 
him. 

Cash  Dr.  (Value  passed  into  an  asset) 50.00 

Notes   Receivable   Cr.    (Value  passed   out  of  an 

asset)    50.00 

(10) 

Received  from  P.  B.  Fisher  cash  $60.00  in  payment  of  balance 
due  on  note  $58.00  and  interest  $2.00. 

Cash  Dr.  (Value  passed  into  an  asset) 60.00 

Notes   Receivable   Cr.   Value   passed   out   of   an 

asset)     58.00 

Interest  Cr.  (Value  passed  out  of  operations) ..."  2.00 

72  C.  Entries  in  Accounts  of  Cash  Payable.  These 
accounts  include  all  records  showing  definite  amounts  of 
money  to  be  paid,  including  creditors'  accounts  under  the 
persons'  names,  or  considered  i  collectively  as  accounts 
payable;  also  Notes  Payable,  Bonds  and  Mortgages  Pay- 
able and  other  obligations  under  suitable  account 
headings. 


THE  JOURNALS-DEBIT  AND  CREDIT  111 

Examples :  (11) 

Bot.  of  W.  Doe  on  account 

20  tons  coal  @  $12.00 $240.00 

Coal    Purchases    Dr.     (Value    passed    into 

operations)     240.00 

W.    Doe    Cr.     (Value    passed    out    of 

liability)    240.00 

(12) 
Paid  W.  Doe  cash  $100  on  account. 

W.  Doe  Dr.   (Value  passed  into  a  liability) 100.00 

Cash  Cr.  (Value  passed  out  of  an  asset) 100.00 

(13) 

Gave  W.  Doe  our  60-day  note  for  $140.00  in  settlement  of  acct. 

W.  Doe  Dr.   (Value  passed  into  a  liability) 140.00 

Notes  Pay.  Cr.  (Value  passed  out  of  a  liability)  140.00 

(14) 

Issued   bonds   payable   for   $20,000,    receiving   cash    therefor 
at  par. 

Cash  Dr.  (Value  passed  into  an  asset) 20,000.00 

Bonds  Payable  Cr.  (Value  passed  out  of  a 

liability) 20,000.00 

(15) 

Paid  W.  Doe  cash  $145.00    in    settlement    of    note  due  him 

$140.00  and  interest  $5.00. 
Notes  Payable  Dr.  (Value  passed  into  a  liability) .  ..140.00 
Interest  Dr.  (Value  passed  into  operations) 5.00 

Cash  Cr.  (Value  passed  out  of  an  asset) 145.00 

72  D.  Entries  in  Accounts  of  Assets  Not  Cash  or 
Cash  Receivable.  These  accounts  cover  all  property  ex- 
cept cash  and  cash  to  be  collected.  When  purchased,  a 
debit  is  made  at  cost ;  when  received  by  other  means  than 
purchase,  a  fair  valuation  is  debited.  They  are  divided 
into  floating  or  current  property,  and  fixed  or  invested 
property.  As  a  rule,  the  floating  property  is  entered  from 
inventory  so  that  the  Inventory  account  contains  a  list 
of  the  floating  property  valued  at  cost  or  at  cost  less 
depreciation. 

The  fixed  property  is  not  subject  to  re-entry  in  the 
books  from  inventory,  but  remains  on  the  books  as  first 
debited,  depreciation  being  shown  by  a  credit  in  such 
accounts  as  do  not  represent  some  replaceable  property, 
and  by  a  credit  in  an  account  of  Reserve  for  Depreciation 
annexed  to  such  accounts  as  represent  replaceable  prop- 
erty of  considerable  value. 


11?  RULES 

Examples : 

(16) 
Bot  of  Graham  &  Co.  for  cash  3  delivery 

trucks  for  use  @  $450.00 $1350.00 

Delivery   Equipment   Dr.    (Value   passed   into   an 

asset)    1350.00 

Cash  Cr.  (Value  passed  out  of  an  asset) 1350.00 

(17) 

Sold  S.  H.  Gorman  for  note  $425.00 
1  delivery  truck  (costing  $450.00) 

Notes  Rec.  Dr.   (Value  passed  into  an  asset) 425.00 

Profit   and    Loss    Dr.    (Value    passed    into    an    un- 
named  operation)     25.00 

Delivery  Equipment  Cr.    (Value  passed  out  of 

an   asset)     _. 450.00 

(18) 

Sold  Peter  Messner  for  cash  $475.00 
.     1  delivery  truck  (costing  $450.00) 

Cash  Dr.   (Value  passed  into  an  asset) 475.00 

Delivery  Equipment  Cr.    (Value  passed  out  of 

an   asset)    450.00 

Profit  and  Loss  Cr.  (Value  passed  out  of  an  un- 
named  operation)     25.00 

(19) 

It  is  ascertained  that  during  a  certain  period  a  delivery  truck 
costing  $450.00  has  depreciated  10%. 
Depreciation  Dr.   (Value  passed  into  operations)...  45.00 
Reserve  for  Depreciation  of  Delivery  Equipment 

Cr.   (Value  passed  out  of  an  asset) 45.00 

(20) 

It  is  ascertained  that  the  land  occupied  by  the  concern,  cost- 
ing $10,000,  would  now  sell  for  $12,000.  No  entry  made.  Account- 
ants consider  appreciation  as  being  so  doubtful  as  to  be  excluded 
from  entry.  An  entry  of  appreciation  might  cause  an  over-esti- 
mate of  income  which  is  unsafe.  An  over-estimate  of  depreciation 
might  cause  an  under-estimate  of  income,  but  that  would  not  be 
unsafe. 

72  E.  Entries  in  Accounts  of  Profit.  These  accounts 
are  named  to  designate  the  nature  or  cause  of  an  income. 
Any  value  coming  into  the  concern  from  a  source  other 
than  even  exchange  for  a  recorded  asset  is  classed  under 
income  or  gain.  A  number  of  entries  crediting  income 
accounts,  have  been  given  in  preceding  examples.  The 
following  five  examples  contain  such  credits. 


THE  JOURNAL— DEBIT  AND  CREDIT  113 

Examples :  (21) 

Sold  P.  Magnus  on  account 
Mdse.  per  Sale  No.  24,  $129.69. 

P.  Magnus  Dr.   (Value  passed  into  an  asset) 129.69 

Mdse.     Sales    Cr.     (Value    passed    out    of    an 

operation)     129.69 

Note. — The  Trading  account  is  made  up  of  three  accounts, 
Sales,  Purchases,  and  Inventory,  which  are  combined  at  the  end 
of  the  accounting  period  to  show  the  trading  income.  The  Sales 
account  is  subsidiary  to  Trading. 

(22) 
Bot  of  Carr  &  Son  on  account 
Mdse.  per  Inv.  No.  5  $461.27. 
Mdse.  Purch.  Dr.   (Value  passed  into  an  operation)  .461.27 
Carr    &    Son    Cr.     (Value    passed    out    of    a 

liability)    •         461.27 

(23) 
Received  cash  $15.00  from  J.  Bennett  in  settlement  of  interest 
due  on  a  note  receivable. 

Cash  Dr.   (Value  passed  into  an  asset) 15.00 

Interest  Cr.  (Value  passed  out  of  an  operation)  15.00 

(24) 
Paid  P.  Magnus  cash  in  settlement  of  Invoice 
No.  24,  for  $129.69,  less  2%  discount. 

P.  Magnus  Dr.   (Value  passed  into  a  liability) 129.69 

Cash  Cr.  (Value  passed  out  of  an  asset) 127.10 

Cash   Discount    Cr.    (Value   passed    out    of    an 

operation)     2.59 

(25) 
Sold  building  and  lot  (costing  $10,000)  for  cash  $12,000.  ' 

Cash  Dr.  (Value  passed  into  an  asset) 12,000.00 

Building  &  Lot  Cr.    (Value  passed  out  of 

an   asset) 10,000.00 

Profit  &  Loss  Cr.   (Value  passed  out  of  an 

operation)    2.000.00 

72  F.  Entries  in  Accounts  of  Loss.  Loss  expendi- 
tures are  debited  in  an  expense  account,  in  an  income  ac- 
count or  account  of  operations  when  considered  a  special 
charge,  or  if  of  an  unusual  nature,  in  Profit  and  Loss.  The 
following  five  examples  contain  such  debits : 

(26) 
Paid  cash  $39.60  for  books  and  stationery  for  office  use. 

Expense  Dr.    (Value  passed  into  operations) 39.60 

Cash  (Cr.  (Value  passed  out  of  an  asset) 39.60 

(27) 
Reimbursed   the   cashier's   fund   for  petty   pay- 
ments out  of  cashier's  fund,  $22.78. 

Expense  Dr.   (Value  passed  into  operations) 22.78 

Cash  Cr.  (Value  passed  out  of  an  asset) 22.78 


114  RULES 

Note. — The  small  payments  made  by  the  cashier  are  entered 
in  memorandum  form  until  such  time  as  a  check  is  issued  for 
them,  when  the  amount  is  debited  to  expense.  The  proceeds  of 
the  check  is  returned  to  the  fund  without  entry  in  the  general 
cash  book  for  the  return. 

(28) 
Sold  coal  bins  and  equipment  (costing  $1350) 
for  cash  $1000.00. 

Cash  Dr.   (Value  passed  into  an  asset) 1000.00 

Profit  &  Loss  Dr.   (Value  passed  into  loss) 350.00 

Coal  Bins  Cr.  (Value  passed  out  of  an  asset)  1350.00 

(29) 

Paid  cash  for  note  due  D.  Maine,  face  $100,  interest  $3.00. 
Notes  Payable  Dr.  (Value  passed  into  a  liability)  .-.100.00 
Interest  Dr.  (Value  passed  into  operations) 3.00 

Cash  Cr.  (Value  passed  out  of  an  asset) ■      103.00 

(30) 

Received  cash  $98.00  from  D.  Collings  in  settlement 
of  a  sale  on  account,  $100.00,  less  2%  cash  discount. 

Cash  Dr.   (Value  passed  into  an  asset) 98.00 

Cash  Discount  Dr.  (Value  passed  into  operations)..     2.00 

D.  Collings  Cr.  (Value  passed  out  of  an  asset) . .  100.00 

72  G.  Entries  of  Readjustment.  These  entries  are 
made  at  the  close  of  the  accounting  period  to  take  into 
account  changes  in  condition  of  the  elements  of  the  busi- 
ness that  have  not  been  previously  recorded  from  the 
transactions.  They  refer  principally  to  inventories  and 
a  systematic  record  of  depreciation.  After  readjustments 
are  made,  the  accounts  are  ready  to  close  into  Profit  and 
Loss. 

Examples : 

(31) 

The  following  inventories,  entered  at  the  beginning 
of  the  accounting  period,  are  found  at  the  close  of  the 
period  as  debits  in  an  account  headed  Inventory : 

Merchandise   15,290.64 

Expense    60.42 

Interest    50.49 


15,401.55 
Trading  Dr.  (Value  passed  into  operations) . .  .15,290.64 
Expense  Dr.  (Value  passed  into  operations) . . .        60.42 
Interest  Dr.  (Value  passed  into  operations)...        50.49 
Inventory    Cr.    (Value   passed    out   of   an 

asset)     15,401.55 


THE  JOURNAL— DEBIT  AND  CREDIT  115 

(32) 

The  following  inventories  at  the  close  of  the  period 
are  to  be  entered  in  the  books: 

Merchandise .21,837.90 

Expense    (unconsumed)    102.61 

Interest   ( receivable )    32.68 


21,973.19 
Inventory  Dr.   (Value  passed  into  an  asset)..  .21,973.19 
Trading   Cr.    (Value   passed   out  of   oper- 
ations)       21,837.90 

Expense   Cr.    (Value   passed   out   of  oper- 
ations)   102.61 

Interest   Cr.    (Value   passed   out   of   oper- 
ations)      32.68 

(33) 

The  following  inventoried  liabilities  carried  from  the 
beginning  of  the  accounting  period  appear  as  credits : 

Expense,  incurred  but  unpaid 55.00 

Interest,  payable  accrued   105.20 

Discounts,  payable  anticipated 210.40 


370.60 
Liability     Inventory     Dr.     (Value    passed    into     a 

liability)     370.60 

Expense  Cr.  (Value  passed  out  of  operations) . .  55.00 

Interest  Cr.   (Value  passed  out  of  operations)..  105.20 

Discounts  Cr.   (Value  passed  out  of  operations)  210.40 

(34)    • 

The  following  liability  inventories  are  made  at  the 
close  of  the  accounting  period: 

Expense  incurred  but  unpaid 73.20 

Interest  payable  accrued   64.37 

Discounts   payable   anticipated 150.20 


2.87.77      . 

Expense  Dr.   (Value  passed  into  operations) 73.20 

Interest  Dr.  (Vahie  passed  into  operations) 64.37 

Discount  Dr.   (Value  passed  into  operations) 150.20 

Liability  Inventory  Cr.   (Value  passed  out  of  a 

liability) 287.77 


116  RULES 

(35) 

The  following  amounts  of  depreciation  are  entered 
at  the  close  of  the  accounting  period: 

Depreciation  in  building  500.00 

Depreciation  in  machinery   1000.00 

Depreciation  in  f urn.  &  fixtures 100.00 

Dep.  in  patterns,  drawings,  etc 600.00 

Depreciation  in  good-will   300.00 

2500.00 
Depreciation- Dr.  (Value  passed  into  operations).. 2500.00 
Reserve  for  Depreciation  in  Building  Cr.   (out 

of  asset)    . .' 500.00 

Reserve   for   Depreciation    in    Machinery    Cr. 

(out  of  asset)    1000.00 

Reserve  for  Depreciation  in  Furn.  &  Fixtures 

Cr.   (out  of  asset)    100.00 

Patterns  and  Drawings  Cr.   (out  of  asset) . . .  600.00 

Good-will  Cr.   (out  of  asset) 300.00 

72  H.  Entries  to  Close  the  Books.  The  general  rule 
given  for  debit  and  credit  *(Prin.  72)  refers  to  entries  for 
transactions  or  operations  only,  but  is  not  applicable  to 
the  entries  for  closing  the  books. 

Closing  entries  are  nothing  more  than  indications  in 
the  journal  that  account  balances  are  carried  from 
nominal  accounts  into  more  general  summaries. 

The  nominal  account  headings  are  merely  names  of 
elements  that  have  entered  into  former  operations 
brought  to  completion  at  the  end  of  the  accounting 
period.  The  elements  of  a  past  period  have  no  value,  and 
the  account  balances  are  carried  to  Profit  and  Loss, 
which,  when  balanced,  shows  the  results  of  the  operations 
summarized  in  one  amount  of  net  profit  or  net  loss.  The 
balance  of  Profit  and  Loss  is  carried  to  the  summaries  of 
Proprietorship,  as  explained  in  Prin.  35-40. 

Examples : 

(36) 

After  readjustment  of  the  ledger  as  *to  assets  and 
liabilities,  the  following  are  the  balances  of  accounts  in- 
volved in  trading : 

Sales,  credit  balance 41,453.68 

Purchases,  debit  balance 25,705.72 

Sales  (balance  carried  to  Trading) .  41.453.68 


THE  JOURNAL— DEBIT  AND  CREDIT  117 

Trading  (balance  from  Sales)..  41.453.68 

Trading   (balance  from  Purchases) .  25,705.72 

Purchases    (balance    carried    to 
Trading)    25,705.72 

(37) 

After  carrying  balances  of  subsidiary  trading  ac- 
counts to  Trading,  the  following  nominal  account  bal- 
ances appear  in  the  ledger : 

Trading,   credit  balance.... 22,295.22 

Selling  Expense,  debit  balance..  6,142.92 

General  Expense,  debit  balance.  8,347.29 

Interest  and  Disc'nt,  credit  bal..      162.91 
Trading  (balance  to  Profit  and  Loss)  22,295.22 

Interest   and    Discount    (balance    to 

Profit  and  Loss)    162.91 

Profit  and  Loss    (balance   from 

Trading  and  Int.  &  Disct. ) .  22,458.13 

Profit  and  Loss  (balances  from  Sell- 
ing and  Genl.  Expense)....  14,490.21 

Selling     Expense      (balance     to 

Profit  and  Loss)    6,142.92 

General    Expense     (balance    to 

Profit  and  Loss)    S,347.29 

(38) 
After  carrying  all  nominal  account  balances  to  Profit 
and   Loss,    there    is    found    to    be    a    credit,  balance    of 
$7967.92  in  the  latter  account,  which  balance  is  to  be  car- 
ried to  the  Capital  account  of  John  Smith,  the  proprietor. 

Profit  and  Loss  (balance  carried  to  Capital  acct)  .7,967.92 

John  Smith,  Capital  (carried  from  P.  &  L) . .  7,967.92 

72  I.  Practical  Journalizing.  A  bookkeeper  should 
be  able  to  arrange  any  entry  in  journal  form,  even  though 
that  is  not  the  form  regularly  used  for  the  given  entry 
in  his  books.    There  are  several  reasons  for  this. 

(1).  Complicated  transactions  may  arise  wherein 
he  may  not  see  clearly  the  equality  of  several  debits  and 
credits,  unless  they  are  arranged  together  in  journal 
form.  Placing  the  entry  in  journal  form  on  a  slip  of 
paper  will  aid  him  in  arriving  at  the  analysis. 

(2).  The  journal  order  is  the  accepted  means  of  ex- 
plaining to  others  orally  the  accounts  to  be  debited  and 
credited.      While    a    bookkeeper    may    post    debits    and 


118  RULES 

credits  from  all  sorts  of  books,  without  direct  reference 
to  an  equality,  yet  he  should,  at  any  time,  be  able  to 
form  a  mental  or  written  picture  of  the  equilibrium  of  all 
the  accounts  involved,  as  shown  in  the  journal  entry. 

(3).  In  large  business  concerns,  the  bookkeeping 
system  may  require  that  a  separate  voucher,  or  sheet, 
be  used  to  describe  each  transaction.  "When  this  is  the 
case,  the  debits  and  credits  are  written  on  the  voucher, 
making  a  statement  which  is  equivalent  to  a  journal 
entry. 

In  referring  orally  to  the  accounts  to  be  debited 
and  credited,  the  debit  title  or  titles  are  named  first; 
afterward,  the  credit  title  or  titles,  with  "to"  between 
the  debits  and  credits.  Thus,  if  an  entry  requires  that 
John  Smith  be  charged  $50,  and  Sales  be  credited  $50,  we 
would  say  "John  Smith  to  Sales,  $50."  If  a  transaction 
should  require  several  debits,  as  Purchases,  $60,  Ex- 
pense $5.50;  and  several  credits,  as  Cash  $10  and  Notes 
Payable  $55.50,  we  would  say  "Purchases  $60,  and  Ex- 
pense $5.50,  to  Cash  $10,  and  Notes  Payable  $55.50." 
Whatever  the  number  of  debits  or  credits,  the  sum  of  the 
debits  must  equal  the  sum  of  the  credits. 


CHAPTER  XIII 

THE  JOURNAL— FORMS  OF 

73.  Every  Business  transaction  may  be  entered  cor- 
rectly in  the  plain  journal.  In  certain  simple  lines  of  busi- 
ness, a  journal  and  a  ledger  are,  all  things  considered,  the 
only  books  needed.  But  commonly,  the  ordinary  routine 
entries  of  a  business  are  made  in  special  books,  leaving 
the  journal  for  entries  of  an  unusual  nature  or  impor- 
tance. 

On  account  of  the  importance,  for  reference,  of  such 
journal  entries  as  are  made,  and  their  relatively  rare 
occurrence  under  ordinary  working  conditions,  especial 
emphasis  is  placed  on  a  full  and  complete  explanation 
of  the  entries  rather  than  on  the  matter  of  making  them 
rapidly.  Young  bookkeepers  often  think  they  have  done 
well  enough,  if  they  merely  indicate  the  ledger  accounts 
to  be  debited  and  credited  by  a  journal  entry,  with  a 
bare  hint  at  the  nature  of  the  transaction  in  the  explana- 
tory portion.  The  experienced  bookkeeper  is  more  con- 
cerned about  clear  and  complete  memoranda,  knowing 
that  in  the  journal,  rather  than  in  other  books  of  origi- 
nal entry,  are  to  be  found  records  of  transactions  that 
may  lead  to  misunderstanding  and  litigation,  especially 
among  the  owners  of  the  business,  if  full  facts  are  not 
clearly  stated. 

73  B.  Different  Uses  for  Journal.  A  complete  journal 
(Prin.  73  C)  contains  all  original  entries,  of  whatever 
nature,  that  pertain  to  a  given  business.  A  general 
journal  (73  D)  contains  such  entries  as  the  other  special 
books  do  not  provide  for.  A  special  journal  (73  E)  con- 
tains entries  of  a  special  nature,  and  may  be  designated 
by  such  names  as  sales  journal,  purchase  journal,  ship- 
ment journal,  credit  journal,  debit  journal,  and  the  like. 
A  columnal  journal  (73  F)  is  one  that,  in  addition  to  the 

119 


120  RULES 

two  ordinary  charge  and  credit  money  columns,  has  other 
columns  in  which  are  grouped  entries  of  a  special  kind. 
73  C.  The  Complete  Journal  contains  all  original, 
entries,  and  is  ruled  so  as  to  provide  space  for  date, 
memoranda,  ledger  titles,  postmark,  and  amounts.  These 
different  parts  of  the  entry  are  arranged  in  somewhat 
different  order  by  different  bookkeepers  or  under  vary- 
ing conditions. 

Form  12  A  is  recommended  as  good.  To  the  left  is  placed  the 
date,  which  is  the  first  thing  looked  for  in  referring  to  an  entry. 
The  wide  space  in  the  center  provides  space  for  the  considerable 
amount  of  memoranda  usually  required  in  journal  entries.  Below 
the  memorandum  are  placed  the  titles  of  the  ledger  accounts  af- 
fected by  the  transaction.  The  debit  title  is  placed  one  space  to 
the  left  of  the  memorandum,  in  order  to  make  it  clearly  dis- 
tinguishable, and  above  the  credit  title,  which  is  placed  slightly 
to  the  right  of  the  debit  title.  Opposite  these  titles,  in  the  money 
columns,  are  the  amounts.  These  are  placed  in  the  debit  and 
credit  columns,  respectively,  and  on  the  same  writing  lines  with 
the  titles.  Immediately  before  the  money  columns  is  the  post- 
mark column.  The  postmark  column  should  be  close  to  the 
amounts  for  greater  convenience  in  postmarking  as  the  posting 
proceeds,  and  to  permit  the  bookkeeper  to  verify  more  quickly  the 
posting  of  the  amounts. 

The  complete  journal  is  often  a  journal  of  several 
columns  as  described  in  Prin.  73  F. 

73  D.  The  General  Journal  may  be  ruled  in  any 
form  used  for  the  complete  journal.  The  term,  general, 
implies  that  there  are  also  special  books  kept  for  the 
entries  of  certain  special  kinds  of  transactions,  and  that 
the  unclassified  transactions,  or  those  of  a  general  signifi- 
cance, are  to  be  recorded  in  the  general  journal. 

The  complete  journal  and  the  general  journal  may  be  thus 
distinguished:  The  complete  journal  contains  all  transactions, 
whereas  the  general  journal  contains  only  such  transactions  as 
have  not  been  entered  in  other  special  books.  For  example,  as- 
suming that  in  an  ordinary  trading  business,  the  three  most 
numerous  classes  of  transactions  will  find  record  in  special  books, 
rather  than  in  the  journal, — i.  e.  cash  received  and  paid  in  the 
cash  book,  merchandise  bought  in  the  purchases  book,  merchan- 
dise sold  in  the  sales  book, — there  remain  certain  kinds  of  entries 
to  be  looked  for  in  the  general  journal.  Among  them  are:  (1) 
entries  affecting  the  proprietor's  accounts;  (2)  entries  showing 
the  closing  of  the  books;  (3)  entries  of  an  unusual  nature;  (4) 
entries  of  correction  or  adjustment;  (5)  entries  or  memoranda  of 
contracts,   agreements,  etc.;    (6)    entries  that  appear  in  part  in 


THE  JOURNAL— FORMS  OF  121 

some  other  book  of  original  entry,  but  cannot  appear  wholly  in  the 
special  book.  When  such  occur,  the  journal  entries  are  regarded 
as  entries  to  be  posted,  and  the  entries  in  the  special  books  as 
entries  already  posted.  An  entry  in  a  special  book  is  to  be  checked 
out,  not  posted  to  the  ledger,  when  it  is  covered  by  an  entry  in  the 
general  journal. 

73  E.  A  Special  Journal  contains  a  certain  kind  of 
entries  that,  for  convenience,  are  separated  from  the 
general  journal.  In  a  sense,  all  books  of  original  entry 
are  journals,  and  entries  in  them  may  be  properly  re- 
ferred to  as  journal  entries.  A  so-called  "special  jour- 
nal" is  rather  in  the  nature  of  an  abstract  of  certain 
entries  that  have  been  arranged  and  put  in  balance  be- 
fore posting.  Thus,  a  sales  journal  contains  the  dates, 
titles,  terms  and  amounts  of  sales,  that  is  to  say,  an  ab- 
stract of  sales,  gathered  from  bills,  and  balanced  ready 
for  posting;  a  purchase  journal  contains  a  similar  ab- 
stract of  invoices;  a  shipment  journal  contains  an 
abstract  of  shipments,  similarly  arranged.  Debit  jour- 
nals are  frequently  used  in  banks  and  wholesale  houses, 
and  contains  no  entries  but  the  debits;  credit  journals, 
on  the  other  hand,  contain  no  entries  but  the  credits. 

73  F.  A  Columnar  Journal  has  one  or  more  special 
money  columns  in  addition  to  the  two  general-  money 
columns.  The  special  columns  are  used  to  separate  items 
of  a  given  kind  from  the  general  miscellany  of  items,  so 
that  those  thus  separated  may  be  added  and  their  sum 
treated  as  one  amount  for  posting  to  a  controlling  ac- 
count or  for  reference.  If  these  were  left  in  the  general 
column,  they  would  have  to  be  posted  or  collected  for 
reference  one  at  a  time.  The  special  column  principle, 
when  properly  applied,  has  saved  an  immense  amount  of 
time  in  bookkeeping;  but,  on  the  other  hand,  when  its 
application  was  faulty,  it  has  caused  a  great  deal  of 
extra  labor. 

A  special  column  can  be  used  advantageously  only 
for  frequently  repeated  entries  of  the  same  kind  that  are 
recorded  consecutively  with  the  other  entries  by  one 
bookkeeper.  Where  several  persons  are  working  on  the 
same  set  of  books,  it  is  generally  more  economical  of  time 


122  RULES 

and  effort  to  substitute  special  books  of  entry  in- 
stead of  adding  special  columns.  There  may  be  instances 
where  a  special  sales  column  in  a  journal,  allowing  the 
sales  to  be  entered  in  the  journal  along  with  other  items, 
would  work  out  to  better  advantage  than  to  separate  the 
sales  entries  from  the  journal  by  the  use  of  a  sales  book. 
But  this  would  seldom  be  advisable. 

The  advantage  of  a  special  column  in  a  journal  must, 
in  each  instance,  be  compared  with  the  alternative  ad- 
vantage of  supplying  a  special  book  to  contain  the  en- 
tries which  the  special  column  is  planned  for,  or  with 
the  extra  work  of  posting  singly  from  a  general  column 
the  items  assignable  to  the  special  column. 

A  special  column  should  not  be  added  to  a  journal 
unless  it  is  clear  that  the  extra  labor  of  making  entries 
in  this  column,  of  carrying  the  footings  of  the  column 
forward  from  page  to  page,  and  finally  of  proving  the 
total  at  the  end  of  the  posting  period,  would  be  less  than 
the  labor  of  posting  the  given  entries  from  a  general 
column.  i 

73  G.  A  Cash  Journal  may  be  used  to  great  advan- 
tage under  certain  conditions.  A  form  of  this  journal 
contains  four  money  columns,  two  for  debits  and 
credits  that  require  posting  to  ledger  accounts, 
and  two  for  deposits  in  the  bank  and  checks 
drawn  against  the  deposits.  This  journal  is  par- 
ticularly well  suited  for  private  individuals  who 
wish  to  keep  concise,  accurate  accounts  of  their 
property  and  obligations,  together  with  their  incomes 
and  expenses.  It  contains  a  complete  record  of  all 
transactions  that  involve  property,  claims  receivable,  and 
obligations  payable,  and  may  contain  any  other  memo- 
randa for  journal  record.  A  detailed  description  fol- 
lows : 

Form  12  W.  Referring  to  this  form,  there  are  shown  five  de- 
scriptive columns,  followed  by  four  money  columns.  The  first  col- 
lumn  is  for  the  date,  the  second  for  explanatory  matter,  the  third 
for  titles  of  ledger  accounts,  the  fourth  for  the  check  number, 
(use  when  the  transaction  involves  the  issuance  of  a  check),  the 
fifth  for  the  postmark  of  amounts  in  the  general  columns  posted  to 


THE  JOURNAI^-FORMS  OF  123 

the  ledger.  There  are  four  money  columns,  numbers  six  to  nine. 
Numbers  six  and  seven  may  contain  all  dpbit  and  credit  amounts. 
In  the  set  which  this  form  illustrates,  all  cash  receipts  are  de- 
posited, and  cash  payments  or  money  required  for  payments  are 
withdrawn  from  the  bank  by  checks.  The  bank  account  is  com- 
paratively active.  Columns  numbered  eight  and  nine  permit  the 
bookkeeper  to  carry  bank  debits  or  credits  from  the  general  col- 
umns to  the  bank  columns,  and  to  that  extent  save  labor  in  posting. 

When  such  a  book  is  used,  it  is  more  convenient  to  balance 
the  bank  columns  and  carry  the  balance  down  in  the  journal  to 
the  following  month,  as  shown  in  the  form,  than  to  post  the  totals 
of  these  two  columns  to  a  bank  account  in  the  ledger,  as  could  be 
done. 

Note. — For  other  cash  journals,  see  Forms  17  M,  22  D  and 
231. 


CHAPTER  XIV 

THE  CASH  BOOK 

74.  The  Cash  Book  contains  the  daily  record  of 
cash  receipts  and  payments.  It  thus  takes  the  place  of 
the  journal  as  a  record  of  cash  transactions.  The  cash 
book  also  provides  for  the  entries  of  receipts  in  a  column 
separate  from  the  entries  of  payments,  making  it  equiva- 
lent to  a  ledger  account  of  Cash. 

Besides  the  general  receipt  and  payment  columns 
used  in  all  cash  books,  one  or  more  special  columns  may 
be  added  for  classifying  special  kinds  of  receipts  and 
payments,  thus  making  a  columnar  cash  book. 

The  cash  book  should  contain  a  satisfactory  explan- 
ation of  all  receipts  and  payments.  Every  entry  should 
be  fully  explained  if  there  is  no  voucher  to  support  it; 
or,  if  there  is,  this  voucher  should  be  described  in  the 
entry  in  such  a  way  as  to  make  it  easy  to  find.  This 
book  is  to  be  kept  with  care;  entries  are  to  be  made 
promptly,  for  it  contains  the  explanation  of  all  re- 
ceipts and  payments.  If  business  is  at  all  active, 
cash  book  balances  resulting  from  these  receipts  and 
payments  should  be  compared  with  the  cash  on  hand  at 
the  close  of  the  day.  Any  discrepancy  should  be  ac- 
counted for  at  that  time.  There  is  the  possibility  that 
certain  cash  has  been  received,  which  the  cash  book  does 
not  account  for,  thus  making  cash  "over;"  or  cash  may 
have  been  paid  which  was  not  entered  and  cannot  be 
remembered,  thus  making  cash  "short."  In  either  case, 
if  the  bookkeeper  cannot  find  the  missing  entry,  he  should 
enter  a  cash  debit  for  the  cash  "over,"  or  a  cash  credit 
for  the  cash  "short,"  and  post  this  entry  to  an  account 
entitled  Cash  Short  and  Over. 

Cash  receipts  are  posted  to  the  credit  of  such  ledger 
accounts  as  explain  the  yield  to  the  business;  cash  pay- 

124 


THE  CASH  BOOK  125 

ments  are  posted  to  the  debit  of  such  ledger  accounts  as 
explain  the  cost  to  the  business. 

Note. — There  may  occur  certain  cash  book  entries  which 
should  not  be  posted  to  the  ledger;  for  example,  a  combined  jour- 
nal and  cash  book  entry  like  this:  Machinery  $500  to  Notes  Pay- 
able $400  and  Cash  $100.  In  this  case,  the  complete  entry  would 
be  made  in  the  journal,  and  the  payment  of  $100,  after  it  is  en- 
tered in  the  cash  book,  would  be  postmarked  "J"  to  show  that  the 
corresponding  charge  for  the  cash  credit  of  $100  is  included  in  the 
charge  to  Machinery  of  $500,  which  is  to  be  posted  from  the  jour- 
nal and  checked  out  of  the  cash  book.  Likewise,  any  entries  in 
both  cash  book  and  journal  are  checked  out  of  the  cash  book  to 
the  journal,  while  the  posting  is  done  from  the  journal. 

The  cash  book  may  be  balanced  and  ruled  daily, 
monthly,  or  at  any  other  period  suited  to  the  require- 
ments of  the  business. 

74  B.  The  One  Page  Cash  Book  (see  Form  10  B  or 
11  A)  has  a  column  for  date  at  the  left,  followed  by 
explanatory  space,  as  wide  as  possible,  with  money  col- 
umns for  receipts  and  payments  at  the  right.  Just  fol- 
lowing the  explanation,  and  preceding  the  money  col- 
umns, are  two  columns,  one  for  the  names  of  the  ledger 
accounts  to  which  the  amounts  in  the  money  columns  are 
to  be  posted,  the  other  for  the  postmarks.  In  the  illus- 
trated cash  book,  no  distinction  is  made  between  currency 
and  check  payments.  If  a  bank  checking  account  is  kept, 
a  record  of  deposits,  checks  and  bank  balance  should  ap- 
pear in  the  check  stubs. 

74  0.  In  the  Two  Page  Cash  Book  (see  Form  13  B) 
the  cash  receipts  are  entered  on  the  left-hand,  or  debit 
page,  and  the  cash  payments  on  the  right-hand,  or  credit 
page.  On  the  debit  side,  the  first  money  column  is  re- 
served for  current  receipts,  which  are  extended  by  totals 
into  the  second  column,  when  deposits  are  made;  the 
amounts  extended  should  agree  with  the  deposit  tickets. 
It  is  usually  possible  to  deposit  all  cash  receipts,  and  this 
should  be  done  as  a  rule. 

Note. — At  the  end  of  the  month,  any  cash  left  over  after 
banking  hours,  should  be  entered  on  a  deposit  ticket,  and  de- 
posited separately  from  the  receipts  of  the  following  day,  thus 
enabling  the  bookkeeper  to  extend  all  receipts  of  the  month  into 
the  second,  or  deposits,  column. 


126  RULES 

On  the  right,  the  payments,  which  are  all  by  check, 
are  entered  in  the  first  column  and  extended  into  the 
second  column,  from  time  to  time,  to  compare  with  the 
deposits.  The  difference  between  the  second  columns  of 
the  two  pages  is  the  balance  of  cash  in  bank. 

Entries  in  the  cash  book  should  show  from  whom 
cash  is  received  and  to  whom  cash  is  paid.  This  is  the 
most  natural  thing  to  write  when  paying  or  receiving 
cash,  and  definitely  locates  the  persons  dealt  with.  There 
should  also  be  a  sufficient  explanation  to  show  the  pur- 
pose of  the  receipt  or  payment.  After  this  explanation, 
the  ledger  title  to  be  credited  from  cash  received,  or 
debited  from  cash  paid,  can  be  written  or  indicated  in 
the  space  before  the  postmark  column,  at  the  convenience 
of  the  bookkeeper.     Then  the  posting  can  be  done. 

Note. — Petty  payments  of  coin  or  bills  have  no  place  in  the 
main  cash  book.  If  placed  in  it,  they  confuse  the  bank  account. 
Petty  entries  also  require  that  time  be  spent  unnecessarily  in  post- 
ing. Although  such  payments  cannot  be  avoided,  they  should  be 
provided  for  by  the  issuance  of  a  check  to  the  cashier  (see  entry 
Nov.  1 )  for  a  Cashier's  Fund  to  meet  petty  disbursements,  which 
he  accounts  for  in  the  petty  expense  book. 

Care  should  be  taken,  when  the  main  cash  book  is 
balanced,  to  rule  up  both  sides  on  the  same  writing  line. 
Enter  the  balance  in  red,  and  carry  it  down  in  black  ink. 
Since  the  balance  is  in  the  bank,  the  amount  is  carried 
down  to  the  second  column  of  the  debit  side. 

74  D.  The  Check  Stub  contains  a  record  of  cash 
payments  by  check,  (further  record  on  the  stub  being 
unnecessary  if  made  in  a  cash  book)  as  explained  in 
Prin.  74  C.  As  a  check  is  not  likely  to  be  issued  out  of 
the  check  book  without  the  stub  being  left,  record  for. 
every  payment  is  practically  assured.  In  addition  to 
that  record,  the  check,  passing  through  the  payee's 
hands,  with  his  endorsement,  is  returned  to  the  maker 
from  the  bank  as  a  receipt.  These  advantages  of  paying 
by  check  make  it  advisable  that  all  disbursements,  except 
from  the  Cashier's  Fund,  be  made  in  that  way.  The  en- 
tries on  the  credit  side  of  the  cash  book  are  taken  from 
the  stubs. 


THE  CASH  BOOK  127 

Note— When  a  check  book  is  carried  about,  instead  of  being 
used  in  the  office,  it  is  generally  advisable  that  the  stub  contain 
the  record  of  deposits  as  well  as  checks,  so  that  the  balance  can 
be  forwarded  on  the  stub  for  immediate  reference.  Forwarding 
balances  on  the  stubs  involves  extra  work  and  often  gives  rise  to 
errors,  unless  very  carefully  attended  to,  so  that  the  check  book 
used  in  the  office  often  does  not  contain  any  other  stub  record  than 
that  of  the  checks  issued. 

74  E.  The  Petty  Expense  Book,  also  called  Petty 
Cash  Book,  as  commonly  used  in  a  business  office,  is  a 
two  column  scratch  book  containing  a  record  in  the 
debit  column  of  checks  issued  to  the  cashier  for  petty 
payments,  and  in  the  credit  column,  entries  of  the  pay- 
ments made.  The  form  is  similar  to  Form  13  0.  This 
record  shows  the  disposition  of  the  money,  which  is  all 
that  is  desired.  The  account  of  the  Cashier's  Fund  in 
the  ledger  is  charged  for  the  expense  checks  as  issued. 
From  time  to  time,  as  the  Cashier's  Fund  runs  low,  the 
cashier  makes  a  voucher  for  the  amount  expended,  and 
receives  a  check  which  restores  the  petty  expense  fund 
to  the  original  amount.  The  entry  in  the  general  cash 
book  for  this  voucher  is  debited  to  Expense. 

74  F.  The  Columnar  Expense  Book  may  be  used  to 
great  advantage  where  it  is  desired  to  classify  expenses 
under  a  number  of  special  headings.  Such  a  book  ».on- 
tains  one  general  column  at  the  left,  to  which  are  posted 
from  the  cash  book  and  from  the  journal,  when  the 
journal  contains  expense  entries,  all  debits  that  are 
included  in  the  general  term  expense.  To  the  right  of 
this  column,  are  placed  a  number  o^  columns,  each 
headed  to  show  a  particular  kind  of  expense.  The  en- 
tries that  were  posted  to  the  first  general  column  of  this 
book,  are,  at  the  convenience  of  the  bookkeeper  or  when 
he  secures  the  necessary  information,  distributed  among 
the  several  columns.  The  sums  of  the  special  columns 
should  equal  the  sum  of 'the  first  general  column.  The 
totals  of  the  special  columns  may  be  posted  in  the  special 
expense  accounts  in  the  ledger,  which  correspond  with 
the  headings  of  the  columns,  once  a  month  or  once  a  year. 
When  it  is  not  thought  necessary  to  post  the  sums  of  the 


128  RULES 

expense  columns  at  all,  the  total  expense  should  be  in- 
cluded in  the  trial  balance  as  one  item,  which  is  explained 
in  detail  by  the  distribution  shown  in  the  separate  col- 
umns of  the  expense  book. 

Examples. —  (1)  In  household  bookkeeping,  a  check  for  $20 
(see  Form  12  W,  check  No.  6)  may  be  issued  to  a  member  of  the 
family  for  family  expenses.  This  amount  would  be  posted  from 
the  original  entry  to  the  general  column  in  the  columnar  expense 
book.  Later  on,  the  member  of  the  family  may  return  a  ticket  or 
memorandum  showing  that  the  $20  had  been  disbursed :  for  cloth- 
ing, $10.80 :  for  groceries,  $6.59 ;  for  car  fare,  25  cts. ;  for  literature, 
$1.10 ;  for  a  frying  pan,  25  cts. ;  unaccounted  for,  or  personal  ex- 
penditure, $1.01  (see  Form  12  X).  These  amounts  can  be  distrib- 
uted from  the  report  to  the  various  columns  headed  to  correspond 
with  the  various  classes  of  expense  mentioned  in  the  memo- 
randum. The  totals  of  these  special  columns  in  the  expense  book 
should  equal  the  total  of  the  general  column.  Any  ordinary  busi- 
ness house  may  distribute  the  expenses  in  a  similar  book. 

(2)  In  a  department  store,  it  is  advantageous  to  distribute 
the  expenses  to  the  departments  by  a  columnar  expense  book,  or 
detail  sheet.  In  the  model  (Form  18 N,  third  illustration)  a  pay- 
ment of  $25  for  advertising  is  distributed  to  departments  1,  2  and 
5  in  the  proper  proportions.  Rent,  light,  and  heat  are  distributed 
according  to  floor-space  occupied ;  advertising  according  to  news- 
paper space — all  expenses  according  to  the  department  benefited 
thereby. 

74  G.  All  cash  receipts,  large  and  small,  should  be 
entered  in  the  cash  book  on  the  day  of  their  receipt. 
However,  some  discrimination  must  be  used  in  deciding 
whether  to  enter  them  directly  into  the  cash  book  when 
the  cash  is  taken  in,  or  to  make  some  special  record 
first.  Retail  stores  usually  record  small  cash  sales  in 
cash  registers,  and  transfer  the  totals  to  the  cash  book 
at  the  close  of  the  day.  If  a  cash  register  is  not  used,  a 
cash  sales  sheet  will  effect  the  same  result.  The  device 
to  record  the  cash  sales  depends  on  their  number  and 
the  precautions  thought  necessary  to  insure  a  complete 
record. 

74  H.  The  Columnar  Cash  Book,  also  called  Special 
Column  Cash  Book,  is  a  cash  book  containing  special  col- 
umns, in  addition  to  the  columns  for  the  cash  account. 

A  special  column  is  used  to  segregate  frequently 
repeated  items  that  are  to  be  posted  to  the  same 
ledger    account.      Such    items,  standing    alone,    can    be 


THE  CASH  BOOK  129 

added  and  their  sum  posted  with  less  labor  than  would 
be  required  to  post  the  items  separately  from  a  .miscel- 
laneous column.  Thus,  if  there  were  a  hundred  entries 
on  the  credit  side  of  the  cash  book,  all  charging  Pur- 
chases account,  the  bookkeeper  would  be  obliged  to 
post  them  one  at  a  time  from  a  miscellaneous  column, 
making  one  hundred  operations.  But  if  the  amounts 
were  carried  to  a  special  column  for  Purchases  account, 
the  total  of  that  column  could  be  posted  in  one  operation. 

A  special  column  on  the  receiving  side  of  cash  is 
frequently  advisable  for  Sales.  Columns  for  accounts  re- 
ceivable, accounts  payable,  discounts,  and  expenses  are 
often  advisable. 

When  the  complete  ledger  is  divided  into  one 
general  and  one  or  more  subsidiary  ledgers,  special 
columns  are  necessary  for  the  items  that  are  to  be  posted 
to  the  subsidiary  ledgers.  The  items  in  such  special 
columns  are  posted  separately  to  the  several  accounts  in 
the  subsidiary  ledger,  and  their  total  to  the  controlling 
account  of  that  ledger,  in  the  general  ledger. 

Thus,  when  the  sales  ledger  is  a  subsidiary  book,  a 
column  headed  Accounts  Receivable  in  the  cash  book 
(receiving  side)  will  contain  the  amounts  of  all  cash 
receipts,  on  book  account,  from  customers.  These  en- 
tries are  to  be  posted  severally  to  the  sales  ledger,  and 
tbeir  total  to  Accounts  Receivable,  (the  controlling  ac- 
count) in  the  general  ledger. 

Likewise,  when  the  purchases  accounts  are  kept  in  a 
subsidiary  purchases  ledger,  a  similarly  used  special  .col- 
umn in  the  cash  book  (paying  side)  would  be  headed 
Accounts  Payable. 

Tn  the  commission  business,  a  similar  column  headed 
Consignors,,  segregates  the  payments  chargeable  to  ac- 
counts in  a  subsidiary  consignors'  ledger. 

Whatever  special  columns  are  included  in  a  col- 
umnar cash  book,  there  must  be  a  general  and  a  net 
cash  column  on  the  receiving  side  and  a  general  and  a 
net  cash  column  on  the  paying  side,  in  order  to  make 
the    book    easy    to    handle    and    examine:       (a)     the 


130  RULES 

receiving  and  the  paying  sides  should  have  a  general 
column  in  each,  to  show  all  amounts  to  be  posted  to  the 
general  ledger.  Such  general  columns  are  headed,  "gen- 
eral," " sundries, ' '  " general  ledger,"  or  "main  ledger" 
by  different  bookkeepers,  all  meaning  the  same  thing; 
(b)  net  cash  columns  are  necessary  in  order  promptly  to 
determine  the  cash  balance  at  any  time.  The  net  cash 
column  on  the  debit  side  is  headed,  "net  cash,"  "re- 
ceipts," or  "net  receipts;"  on  the  credit  side  the  headings 
may  be  "net  cash,"  "checks,"  or  "net  payments,"  etc. 
Different  bookkeepers  use  different  headings.  Both  the 
net  receipt  and  the  net  payment  columns  are  footed  in 
pencil  or  red  ink  from  time  to  time,  when  it  is  desired 
to  determine  the  cash  balance  without  balancing  the  cash 
book. 

Other  columns  may  be  placed  between  the  general 
and  the  net  columns  of  either  side,  the  number  of  special 
columns  depending  on  the  number  of  kinds  of  items  the 
bookkeeper  wishes  to  segregate  from  the  general  posting 
column  for  the  purpose  of  posting  by  totals.  For  a 
fuller  description  and  illustration  of  a  columnar  cash 
book,  study  the  following  paragraphs: 

Form  18  C.  The  form  given  illustrates  a  columnar  cash  book 
adaptable  to  a  wholesale  or  a  wholesale  and  retail  business,  either 
departmentalized  or  not.  A  change  in  one  or  two  headings  will 
adapt  it  to  a  voucher  system,  to  manufacturing,  or  to  a  commis- 
sion business. 

i 

On  the  Receiving  Side,  beginning  with  column  No.  1,  is  the 
date.  Column  No.  2  contains  the  name  of  the  person  from  whom 
cash  is  received  and  any  other  explanatory  matter.  Column  No.  3 
shows  the  titles  of  such  accounts  as  are  posted  to  the  general 
ledger,  direct  from  the  entry.  Column  No.  4  contains  the  post- 
marks. Column  No.  5  shows  the  amounts  to  be  posted  direct  to 
the  general  ledger.  These  items  consist  of  a  number  of  first 
entries,  and,  at  the  close  of  the  month,  the  totals  from  columns 
6,  7.  and  8  which  are  transferred  to  it.  Columns  Nos.  6  and  7  are 
considered  together;  No.  6  shows  the  credits  to  customers  who 
have  remitted  on  book  account.  No.  7,  the  amounts  of  cash  dis- 
count allowed  them.  For  example,  on  Nov.  4,  E.  C.  Horton  re- 
ceives credit.  $86.72.  for  payment  of  his  invoice  of  Nov.  2,  (11-2). 
He  was  allowed  $1.73.  cash  discount,  having  actually  paid  $84.99 
in  settlement  of  that  item',  as  shown  in  the  net  cash  column,  No.  9. 
Column  No.  8  shows  the  total  of  the  miscellaneous  cash  sales,  made 
during  the  day.     This  total  may  be  taken  from  cash  registers,  a 


THE  CASH  BOOK  131 

list  of  cash  sales  tickets  on  sales  sheets,  or  otherwise  totaled  on 
first  records  before  transfer  to  the  cash  book.  Column  No.  9  shows 
cash  actually  received,  which  has  previously  been  entered  for  post- 
ing in  one  or  several  of  the  columns  Nos.  5,  6,  7  and  8.  Column 
No.  10  shows  the  extensions  from  column  No.  9,  agreeing  with  the 
deposits  as  made.  On  the  last  day  of  the  month,  any  cash  re- 
ceived after  banking  hours  is  entered  on  a  deposit  ticket,  and  de- 
posited the  next  day  separately  from  the  receipts  of  the  next  day. 
By  this  means,  the  entire  receipts  of  the  month  may  be  extended 
to  the  deposit  column.  The  footing  of  the  deposits  column  is  the 
total  cash  debit. 

When  the  cash  book  is  balanced,  the  entries  of  the  receiving 
side  are  proved  correct  by  comparing  the  total  of  columns  Nos. 
5,  6,  and  8  diminished  by  the  total  of  column  No.  7,  with  the  total 
of  the  net  cash  column.  When  found  correct,  the  totals  of  col- 
umns Nos.  6  and  8  are  carried  down  to  the  general  column,  to  be 
posted  as  credits  in  the  general  ledger,  and  the  total  of  column 
No.  7  is  carried  to  the  general  column  to  be  posted  as  a  debit  in 
the  general  ledger. 

On  the  Paying  Side,  columns  Nos.  11,  13,  14,  15,  and  16  are 
used  for  cash  credits  like  the  columns  Nos.  1,  2,  3,  4  and  5  for  cash 
debits.  Columns  Nos.  17  and  18  show  debits  to  creditors  on  book 
account,  and  cash  discounts  allowed,  the  net  remittances  being 
entered  in  column  No.  21.  All  payments  are  niade  by  check,  so 
that  the  column  headed  Checks  is  the  net  cash  column.  Items  too 
small  for  a  check  are  paid  by  the  cashier  out  of  a  fund  which  is 
charged  to  an  account  in  the  ledger — see  check  No.  2.  When  ttie 
cashier  needs  more  money  for  small  payments,  he  turns  in  the 
voucher  for  the  currency  payments  he  has  made,  and  takes  a 
check  for  their  amount,  which  leaves  him  with  the  original  ex- 
pense fund  of  $50 — see  check  No.  13.  Column  No.  19  shows  pay- 
ments which  will  be  added,  and  charged  to  Purchases  at  the  end 
of  the  month.  Column  No.  20  shows  all  items  chargeable  to  Ex- 
pense. In  a  business  sufficiently  well  organized  to  use  this  form 
of  cash  book,  there  would  unquestionably  be  several  subdivisions 
of  the  Expense  account.  It  is  impracticable  to  insert,  in  a  com- 
pact cash  book,  columns  for  such  subdivisions.  To  distribute  the 
items  in  this  column,  post  them  to  the  expense  book,  where  they 
can  be  distributed  to  the  extent  desired. 

Before  balancing  the  cash  book,  the  disbursements  are  proved 
by  adding  the  sums  of  columns  Nos.  16,  17,  19,  20  and  subtracting 
from  the  total  the  sum  of  column  No.  18.  The  result  should  equal 
the  sum  of  column  No.  21.  Columns  Nos.  17  to  20  are  carried  to 
the  general  column  for  posting,  as  on  the  side  of  the  cash  book  for 
receipts.  The  balance  is  then  entered  in  the  column  No.  21,  and 
after  ruling  and  balancing,  is  carried  below  the  ruling  to  column 
No.  10. 


.  CHAPTEE  XV 

THE  SALES  BOOK 

75.  A  large  share  of  the  bookkeeping  work  in  most 
concerns  is  given  to  sales  records.  Hence,  any  means 
of  arranging  and  abbreviating  selling  records  so  as 
to  reduce  the  clerical  labor  involved,  results  in  an 
appreciable  saving  of  labor.  The  matter  of  saving  time 
and  labor  in  connection  with  sales  records  is  deemed  so 
important,  that  a  number  of  distinct  systems  have  been 
devised.  A  suitable  one  for  a  given  business  may  be 
selected  from  these.  A  system  suitable  for  recording  the 
sales  of  a  retail  grocery,  or  meat  market,  would  be  en- 
tirely inadequate  for  recording  the  sales  of  a  retail 
lumber  yard.  Neither  of  these  would  be  suitable  for  a 
wholesale  grocery,  dry  goods  or  drug  house.  In  this  chap- 
ter, systems  of  sales  records  for  typical  conditions  are 
discussed. 

75  B.  The  ordinary  record  for  merchandise  sold 
(see  Form  13  C),  commonly  called,  in  the  office,  the  Sales 
Book  or  Order  Book,  is  ruled  much  like  a  journal. 
Journal  ruling  will  do  very  well  for  the  purpose,  although 
some  of  the  vertical  lines  of  the  journal  are  not  needed 
to  record  the  sales.  In  the  form,  the  date  of  the  sale  is  at 
the  left;  the  name  of  the  buyer  and  the  terms  follow  on 
the^same  line.  Below,  in  the  explanatory  space,  are  the 
items  extended  into  the  first  money  column.  The  total 
is  carried  to  the  second  column.  Discounts  allowed  at 
time  of  sale  should  be  deducted,  before  carrying  the 
charge  to  the  second  column.  If  the  sale  is  for  cash,  the 
amount  is  charged  to  the  Cash  account  (see  cash  sale 
Nov.  2  or  Nov.  24,  charged  to  Cash  on  Form  13  B).  If 
the  sale  is  made  on  book  account,  the  amount  is  posted 
to  the  debit  of  the  customer's  ledger  account.  (See  charge 
sale  Nov.  7  posted  to  131.)  If  the  merchandise  is -sold 
for  a  note,  the  amount  is  charged  to  Notes  Receivable  ac- 

132 


THE  SALES  BOOK  133 

count,  in  the  same  manner  as  a  charge  sale  is  to  an  indi- 
vidual account. 

The  sales  book  is  footed  and  the  total,  at  the  end  of 
the  month,  is  posted  to  the  credit  of  Sales  account.  (See 
total,  Nov.  30,  posted  to  Form  13  F.)  Thus,  if  the  sales 
book  has  the  correct  total  before  final  posting,  there  will 
be  entered  in  the  cash  book  and  posted  to  the  ledger  an 
aggregate  of  charges  equal  to  the  credit  posted  to  Sales. 

75  C.  The  Duplicate  Sales  Book  contains  blank  bill 
forms,  one  or  several  to  the  page,  perforated  at  the  mar- 
gins, so  that  the  bills  may  be  removed  and  delivered  to 
the  customers.  The  sheet  under  the  bill  to  be  delivered, 
is  a  duplicate,  to  be  retained  and  posted  from,  as  from 
an  ordinary  sales  book.  The  copy  of  the  bill  delivered  is 
made  on  the  duplicate  sheet  by  means  of  carbon  paper  in- 
serted between  the  sheets.  This  enables  the  billing  clerk 
to  make  the  bill  and  the  office  record  at  one  writing.  The' 
duplicate  sheet  is  often  on  paper  of  a  different  tint  from 
the  bill  sheet,  so  that  they  may  be  distinguished  readily. 

This  system  is  good  in  any  bulk  merchandising  or 
service  business,  where  the  items  billed  are  comparatively 
uniform  in  number.  Other  systems  of  duplicate  billing 
are  described  later. 

75  D.  Shopkeepers'  Bill  and  Charge  System.  Gro- 
cers, butchers,  and  other  shopkeepers  frequently  have 
regular  customers  to  whom  they  sell  daily  on  account. 
In  order  to  avoid  the  labor  of  posting  the  daily  charges 
to  customers'  accounts,  it  is  quite  common  to  keep  a 
separate  bill  and  charge  book  for  each  customer.  Such 
a  book  contains  a  number  of  sales  slips  alternating 
with  record  slips  for  carbon  duplication.  When  an 
order  is  filled  the  sale  slip  shows  the  items,  and  these, 
as  entered,  are  copied  on  the  duplicate  by  means  of  a 
carbon  paper  device.  At  the  top  of  the  money  column 
of  a  charge  slip  and  duplicate,  the.  balance  due  has 
been  carried  from  thev  previous  slip.  This  amount  is 
added  in  with  the  extensions  of  the  present  slip,  and 
the  total  carried  forward  to  the  following  slip  and 
duplicate.     Thus  the  amount  owed  by  the  customer  is 


134  RULES 

always  apparent  both  on  the  bill  and  the  duplicate,  when- 
ever an  order  is  filled.  If  the  customer  makes  a  payment 
on  account,  the  amount  is  entered  on  the  following  slip 
and  subtracted  from  the  balance  carried  forward.  (See 
Forms  1.7  F  and  17  G.) 

The  bill  and  charge  books  for  the  several  customers 
are  arranged  in  a  case  in  the  order  of  the  customers' 
names  taken  alphabetically. 

The  total  of  accounts  receivable  may  be  found  at  any 
time  by  adding  the  balances  shown  in  these  books. 

75  E.  In  the  wholesale  business,  where  orders  are 
taken  largely  by  traveling  salesmen,  or  from  the  mail, 
and  where  the  great  volume  of  business  demands  close 
daily  attention  to  profits  and  expenses,  the  following 
described  system  is  in  general  use : 

The  orders  for  goods,  whether  coming  from  traveling 
salesmen,  from  the  mail,  or  by  telephone,  or  from  a 
customer  at  the  counter,  are  placed  on  uniform  order 
blanks,  showing  buyer,  quantity  of  each  item,  prices, 
routing,  and  terms.  The  order  blanks  also  have  mem- 
oranda spaces  to  designate  the  salesman  who  took 
the  order,  the  credit  man  who  passed  it,  the  shipping 
clerk  who  filled  it,  the  bill  clerk  who  billed  it,  the  carrier 
by  which  it  was  forwarded,  and  the  department  from 
which  the  goods  were  taken,  if  the  stock  is  in  depart- 
ments. These  spaces  are  filled  by  the  initials  of  the  re- 
sponsible persons  through  whose  hands  the  order  passes 
while  being  disposed  of. 

After  the  order  is  approved  by  the  credit  man,  it  is 
entered  in  an  order  register  from  which  it  receives  its 
number.  This  order  register  is  kept  as  a  check  on  the 
person  or  department  that  fills  the  order. 

When  filled,  the  shipping  clerk  places  his  initial  in 
the  blank  space  of  the  sheet  provided  for  that  purpose, 
and  returns  it  to  the  office  where  it  is  marked  off  the 
order  register.  The  order  sheet  is  then  passed  to  the 
bill  clerk  who  makes  out  the  bill  for  it,  which  is  mailed 
to  the  customer.    After  the  bill  clerk  has  finished  the  bill- 


THE  SALES  BOOK  135 

ing,  the  order  sheet  is  passed  to  the  bookkeeper,  who 
posts  the  charge  to  the  debit  of  the  customer's  ledger  ac- 
count. After  posting  to  customers'  accounts  the  loose 
order  sheets  are  assembled,  placed  in  numerical  order,  to 
make  sure  that  none  are  missing,  and  bound  in  a  loose- 
leaf  binder. 

At  the  close  of  the  month,  the  sheets  in  the  loose-leaf 
binder  are  totaled,  (an  adding  machine  should  be  used 
where  possible)  and  the  total  posted  to  the  credit  of  the 
Sales  account;  or  if  the  store  is  departmentized,  the 
credits  would  be  divided  among  the  various  Department 
Sales  accounts,  through  sales  detail  sheets.  The  debit 
amounts  to  balance  these  credits,  have  already  been 
posted  to  the  customers'  accounts  in  a  complete  ledger, 
or,  if  the  customers'  accounts  are  kept  in  a  subsidiary 
ledger,  the  total  sales  would  be  posted  to  the  debit  of 
Accounts  Receivable  (the  controlling  account)  in  the 
general  ledger. 

Note. — Before  placing  these  order  sheets  in  a  binder,  if  daily 
profits  are  to  be  computed,  the  sheets  will  be  passed  to  the  profit 
clerk,  who,  by  comparison  of  cost  and  selling  prices,  will  compute 
the  profit  on  each  item  sold,  and  show  from  their  total,  the  daily 
gross  profit  on  sales. 

When  the  orders  are  sent  in  by  different  salesmen, 
the  sales  manager  can  satisfy  himself  as  to  the  amount 
of  sales  each  salesman  makes,  by  assorting  the  sales  sheets 
and  entering  the  amounts  in  columns  headed  by  sales- 
men's names. 


CHAPTER  XVI 

THE  PURCHASES  BOOK 

76.  The  records  of  merchandise  bought  are  kept  in 
different  ways,  depending  on  the  volume,  terms  of  pur- 
chase, and  other  circumstances,  as  well  as  on  the  require- 
ments of  the  general  accounts  affected.  For  example,  the 
records  of  merchandise  bought  in  a  department  store 
must  be  kept  in  different  form  from  those  of  a  store  not 
departmentized.  Some  kinds  of  business  require  con- 
stant ready  reference  to  past  itemized  invoices,  when 
future  orders  are  placed;  some  do  not.  Some  require  a 
method  for  determining  maturity  dates  of  invoices,  in 
order  to  take  discounts ;  some  do  not.  The  following  de- 
scribed systems  for  records  of  trading  purchases  are  suit- 
able for  most  conditions : 

76  B.  The  ordinary  record  for  trading  goods  bought 
(Form  13  D),  called  purchases  book,  bought  book,  or  in- 
voice book,  contains  the  buying  records  entered  in  form 
similar  to  the  records  in  an  ordinary  sales  book,  showing 
date,  from  whom  bought,  terms,  amounts  of  items  ex- 
tended in  the  first  column,  and  the  total  amount  in  second 
column. 

The  amount  of  an  invoice  bought  on  account  is 
posted  to  the  credit  of  the  seller's  account  (see  entry 
Nov.  2,  posted  to  Form  13  H) ;  the  amounts  of  merchan- 
dise bought  for  cash  are  balanced  by  entries  on  the  credit 
side  of  the  cash  book  (see  entry  Nov.  6,  balanced  by  cash 
payment  in  Form  13  B);  the  amounts  of  purchases  for 
notes  or  acceptances  are  posted  to  the  credit  of  Notes 
Payable. 

The   purchases   book  is   footed   at   the   end   of  the 
month,  and  the  total  is  charged  to  Purchases  account,  in  - 
the  ledger.     (See  total  Nov.  30,  posted  to  Form  13  G.) 
Thus,  if  the  purchases  book  is  footed  correctly  before 
posting,   there   will   be   carried   to   the    cash   book   and 

136 


THE  PURCHASES  BOOK  137 

ledger,  credits  that,  in  the  aggregate,  will  equal  the  total 
carried  to  the  debit  of  Purchases  account. 

76  C.  Buying  Records  Suitable  for  Extensive  Busi- 
ness. In  most  concerns,  trading  purchases  are  made  on 
account  subject  to  discount  for  early  payment.  Points 
in  the  record  to  keep  in  mind  are  (1)  to  give  credit  to  the 
firm  from  whom  bought  on  account  (if  not  on  account, 
credit  Cash  or  Notes  Payable) ;  (2)  to  make  a  monthly 
charge  to  the  Purchases  account  for  the  total. 

In  order  to  insure  payments  without  loss  of  discount 
or  credit,  a  record  should  also  be  kept  of  the  maturities 
and  discount  dates  of  the  invoices  payable.  Also,  the 
invoices  themselves  should  be  kept  where  they  are  readily 
accessible  for  reference. 

"When  the.  invoice  is  received,  the  following  steps  are 
taken  for  its  disposal: 

(1).  Compare  the  items  in  the  invoice  with  the 
actual  goods  received,  checking  off  the  items  that  agree. 
Place  the  pencil  check  marks  before  the  items.  The 
check  marks  show  that  the  goods  were  actually  received 
as  billed,  that  there  were  no  shortages  or  omissions. 

(2).  Verify  the  extensions,  that  is,  see  that  the 
multiplications  and  additions  on  the  bill  are  correct. 
Indicate  these  verifications  by  check  marks  also. 

(3).  See  that  the  goods  received  agree  with  your 
order  as  to  terms,  items,  prices  and  samples. 

(4).  If  any  errors  are  found  in  the  invoice,  report 
such  errors  at  once  to  the  seller,  asking  for  a  corrected 
invoice,  or  other  adjustment  as  the  case  may  require.  Do 
not  post  any  entry  until  the  adjustment  is  completed. 

(5).  If  the  invoice  is  found  correct,  indicate  its 
verification  by  writing  "0.  K."  or  other  words  signi- 
fying that  it  is  ready  for  entry. 

(6).  The  verified  invoice  should  be  given  a  one-line 
entry  in  the  purchases  register,  from  which  it  is  posted 
to  the  creditor's  account,  if  a  credit  purchase. 

Note. — In  department  bookkeeping,  it  is  customary  for  whole- 
salers to  enter  the  full  amount  of  the  invoice  in  the  invoice  ledger, 
allowing  the  discount,  when  paid,  to  go  to  an  account  of  Purchase 


138  RULES 

Discounts.  In  a  retail  department  store,  the  discounts  are  usually 
deducted  and  the  bills  entered  at  the  net  amount.  The  reason  for 
this  is,  that  the  manager  of  each  department  (also  called  the 
buyer)  is  considered  entitled  to  show  profits  for  his  department, 
based  on  the  best  price,  including  discount,  that  he  is  able  to  se- 
cure on  his  purchases.  In  the  latter  case,  if  the  management  of 
the  store  should  fail  to  take  advantage  of  discounts — an  unusual 
occurrence — this  discount  would  be  chargeable  to  Office  Expense, 
and  not  to  the  cost  of  purchases  for  the  given  department. 

(7).  After  the  invoice  is  entered  and  numbered,  it 
is  placed  in  a  file  with  other  invoices  from  the  same  firm. 

Note. — Invoices  are  sometimes  pasted  into  invoice  books,  from 
which  they  are  posted  to  the  accounts.  This  kind  of  invoice  book 
is  going  out  of  use,  because  it  is  necessarily  bulky,  inconvenient, 
and  difficult  to  post  from;  besides,  the  books  that  have  been  filled 
occupy  much  storage  space. 

(8).  When  an  invoice  is  paid,  it  is  taken  from  the 
file  and  sent  to  the  creditor  to  be  receipted  and  returned. 
When  a  receipted  bill  is  returned,  it  is  again  placed  in 
the  file.  Remittances  may  be  made  without  sending  the  in- 
voices with  the  remittance ;  in  that  case,  a  receipt  should 
be  returned,  which  is  filed. 

(9).  At  the  close  of  the  month,  the  footings  of  the 
invoice  register  are  charged  to  Purchases  account  (or  to 
department  accounts  if  these  are  carried).  The  credits 
have  already  been  posted  to  the  various  accounts  pay- 
able. If  the  accounts  payable  ledger  is  subsidiary,  the 
total  is  posted  to  the  proper  controlling  account  in.  the 
general  ledger. 

76  D.  The  Voucher  System  for  accounts  payable, 
as  commonly  used,  provides  a  substitute  for  ledger  ac- 
counts with  creditors  by  using  voucher  forms  on  which 
the  amounts  payable  are  entered,  each  form  describing 
one  invoice  or  payment. 

When  an  invoice  payable  is  allowed,  a  blank  form 
called  a  voucher  form,  or  a  voucher  jacket,  is  filled  in 
with  the  written  memoranda  necessary  to  describe 
the  invoice,  and  to  show  the  account  or  accounts  to  be 
charged  for  the  purchase.  The  form  is  given  a  one-line 
record  in  a  vouchers  payable  register.  This  is  a  col- 
umnar special  journal,  having  debit  columns  headed  to 
show  the  different  ledger  accounts  debited  for  the  several 
purchases  which  may  include  merchandise,  'material  for 


THE  PURCHASES  BOOK  139 

manufacture,  expense  material,  services  or  other  items. 
A  credit  column,  headed  Vouchers  Payable,  shows  the 
amounts  of  all  vouchers.  The  lines  in  the  voucher  regis- 
ter are  numbered,  and  the  numbers  are  transferred  to 
the  vouchers,  as  the  latter  are  recorded.  After  record* 
the  invoices  are  folded  in  the  voucher  jackets,  and  placed 
in  a  clip  or  file,  in  the  order  of  their  maturity,  those 
maturing  first  being  at  the  top. 

When  an  invoice  is  to  be  paid,  the  voucher  jacket 
is  taken  out  of  the  clip  and  sent,  with  the  check  or  draft, 
to  the  payee.  The  latter  is  expected  to  fill  in  a  blank 
receipt  printed  on  the  voucher  jacket,  and  return  it; 
On  the  return  of  the  voucher  jacket,  it  is-  placed  in  a 
file  in  numerical  order  with  the  other  receipted  vouchers. 
The  invoice  is  placed  in  a  separate  file,  that  contains 
all  the  invoices  from  the  given  firm. 

By  this  means,  the  unpaid  invoices  are  always  before 
the  bookkeeper  in  the  order  of  their  maturity,  and  re- 
ceipts for  paid  invoices  can  be  referred  to  by  number. 
There  is  a  separate  file  for  each  trade  creditor,  where 
the  inv  ices  themselves  are  kept,  and  where  they  are 
easily  accessible. 

When  the  invoices  are  not  numerous,  the  same  prac- 
tical result  may  be  secured  by  stamping  on  the  invoice 
itself,  the  form  for  the  voucher  description  required, 
and  handling  the  invoice  in  like  manner  as  a  voucher 
jacket  is  handled. 

The  vouchers  payable  register  is  footed,  ruled  and 
posted  monthly.  The  several  totaN  of  the  charge  col- 
umns are  posted  to  the  debit  of  the  ledger  accounts,  and 
the  credit  column  total  to  the  credit  of  Vouchers  Pay- 
able. The  Vouchers  Payable  account  is  equivalent  to 
Accounts  Payable,  as  the  latter  is  kept  when  the  voucher 
system  is  not  used.  When  a  voucher  system  is  used, 
the  cash  book  requires  a  column  on  the  paying  side  for 
Vouchers  Payable.  Thus,  in  Form  18  0.  the  heading  of, 
column  No.  17,  Accounts  Payable,  would  be  changed  to 
Vouchers  Payable. 


CHAPTER  XVII 

THE  INVENTORIES  BOOK 

77.  The  Inventories  Book  presents  a  record  of  all 
floating  assets  and  liabilities  under  the  dates  when  taken. 
In  a  small  business,  inventories  may  be  listed  in  the  jour- 
nal; but  in  an  extensive  business,  a  separate  book  is 
necessary,  because  of  the  page  space  required  to  list  a 
large  stock  of  goods,  also  because  if  kept  in  a 
separate  book,  inventories  for  different  accounting 
periods  are  easily  accessible  for  comparison. 

In  making  the  inventories,  both  assets  (Prin.  77  B) 
and  liabilities  (Prin.  77  C)  are  considered. 

77  B.  Among  asset  inventories,  the  most  important 
is  that  of  trading  goods  in  stock,  which  is  entered,  as 
shown  in  Form  4  H,  to  show  the  quantity  and  value. 

In  a  manufacturing  business,  a  list  of  materials  in 
stock,  to  be  used  in  manufacturing,  is  likewise  entered 
in  the  inventories  book,  to  show  quantity  on  hand,  and 
value. 

It  frequently  happens  that  material  or  labor  not 
consumed,  that  has  been  bought  and  charged  to  expense, 
is  carried  over  from  one  accounting  period  to  the  next. 
This,  if  of  considerable  value,  should  be  entered  as  an 
expense  inventory. 

Interest  earned  by  the  business,  but  not  yet  received, 
should  also  be  entered  in  the  inventory  book,  to  show 
the  amount  accrued,  which  is  a  part  of  the  earnings  for 
the  period. 

Any  other  accrued  earnings  of  the  business,  which 
have  not  been  entered,  but  which  have  an  asset  value, 
should  be  listed  in  the  inventories  book. 

The  total  asset  inventories  are  shown  in  a  journal 
entry  (see  Form  14  D)  debiting  Inventory  account 
with  the  entire  amount,  and  crediting  Trading  account 
for    trading    goods.    Materials    account    for    materials, 

140 


THE  INVENTORIES  BOOK  141 

Expense  account  for  value  remaining  that  had  been 
previously  charged  to  expense,  and  Interest  account  for 
interest  earned  and  included  in  the  inventory. 

77  C.  Liability  Inventories  consist  of  otherwise  un- 
recorded amounts  payable  at  the  close  of  the  accounting 
period.  These  should  likewise  be  entered  in  the  inven- 
tory book.  Among  them,  are  interest  accrued  on  bills 
payable,  and  wages  earned  by  employees  but  not  paid. 
The  purpose  of  entering  these  in  the  liability  inventory 
is  to  keep  an  account  of  the  losses  assignable  to  the 
given  accounting  period,  even  though  they  have  not  been 
paid. 

The  total  liability  inventories  are  shown  by  a  jour- 
nal entry  charging  Interest,  Expense,  or  whatever  titles 
would  be  charged  had  the  items  owed  been  paid,  and 
crediting  Liability  Inventories  account,  by  items.  (See 
Form  14  N,  transferred  to  14  D.) 

77  D.  Depreciation  is  taken  into  account  at  the 
time  the  inventories  are  entered.  A  record  of  the  amount 
and  percentage  of  depreciation  may  appear  with  the 
other  items,  in  the  inventories  book. 

The  amounts  of  depreciation  are  shown  by  a  journal 
entry  debiting  the  proper  operative  account,  and  credit- 
ing Reserve  for  Depreciation.  (See  Form  14  N  trans- 
ferred to  14  D.) 


CHAPTER  XVin 

SPECIAL  BOOKS 

78.  When  several  persons  are  doing  the  bookkeep- 
ing work  in  a  single  office,  it  is  generally  necessary  to 
divide  the  work  of  making  first  entries  among  assistants, 
each  one  recording  a  certain  variety  of  transactions  be- 
longing to  his  division  of  the  work.  These  divisional 
records  are  made  in  special  books,  so  arranged  that  the 
aggregate  results  of  the  transactions  recorded  in  any  one 
book  may  be  summarized  on  tickets  for  the  head  book- 
keeper, who  transfers  the  entries  from  the  tickets  to  the 
posting  books. 

Special  books  are,  to  a  large  extent,  ruled  and 
printed  to  suit  the  business  where  used,  new  forms  being 
made  as  needed.  They  are  necessary  in  every  large  office. 
In  a  bank,  the  following  special  books  are  needed: 
(1).  Individual  ledger,  in  which  the  individual  book- 
keeper enters  the  deposits  and  checks  and  extends  cus- 
tomers' totals.  At  the  close  of  the  day  he  passes  to  the 
head  bookkeeper  tickets  crediting  Deposits  for  the  total 
of  the  day's  deposit  slips,  and  charging  Deposits  for 
the  total  of  the  day's  checks.  (2).  Loan  and  discount 
register,  in  which  the  discount  clerk  records  all  paper 
discounted  by  the  bank.  At  the  close  of  the  day,  he 
passes  to  the  head  bookkeeper,  tickets  charging  Loans, 
Discounts,  and  Accrued  Interest,  and  crediting  Discount. 
(3).  Draft  register,  in  which  the  draft  clerk  enters  the 
record  of  drafts  sold.  Tickets  are  made  crediting  the 
drawee  banks  for  the  totals  of  drafts  sold  and  Exchange 
for  the  total  of  exchange  collected  from  sale  of  drafts. 
(4).  Remittance  register,  in  which  the  remittance  clerk 
enters  all  drafts  and  cheeks  cashed  during  the  day, 
which  are  sent  to  correspondent  banks  for  credit.  He 
passes  to  the  head  bookkeeper  tickets  charging  the  banks 
to  which  remittance  is  made.     (5).     Collection  register, 

142 


SPECIAL  BOOKS  143 

in  which  the  collection  clerk  enters  the  paper  left  for 
the  bank  to  collect.  As  he  collects  the  items,  he  makes 
separate  tickets  crediting  the  persons  for  whom  col- 
lected, (if  a  depositor,  through  the  individual  ledger;  if 
an  out-of-town  person,  through  the  draft  register)  also  a 
ticket  crediting  Collection. 

A  local  agent  of  a  railroad  company  makes  the  rec- 
ords pertaining  to  his  office  in  special  books  and  forms: 
among  them,  the  local  cash  book,  freight  forwarded  book, 
freight  received  book,  ticket  summary  book,  etc.  Re- 
ports or  abstracts  from  these  books  are  forwarded  to 
the  general  offices  of  the  company,  and  from  these  the 
general  books  are  compiled. 

In  the  manufacturing  business,  the  various  elements 
of  cost  entering  into  the  product  as  a  whole,  or  by  the 
piece,  are  collected  on  various  special  forms  and  books 
as  the  work  progresses.  The  final  results  or  general 
totals  of  these  daily  records  are  to  be  transferred  td 
and  debited  in  the  posting  books. 

In  a  retail  store,  the  cash  sales  are  first  recorded  in 
cash  registers  and  sales  sheets,  from  which  the  aggre- 
gates are  carried  to  the  cash  book. 

A  traveling  salesman  makes  first  records  of  his 
expenses  in  a  pocket  expense  book,  from  the  total  of 
which  a  ticket  is  made  for  entry  in  the  office  cash  book 
or  journal. 

From  the  above  examples,  it  is  readily  seen  that  all 
special  books  should  be  preserved  as  a  part  of  the  records 
of  the  office. 


CHAPTER  XIX 

AUXILIARY  BOOKS 

79.  Auxiliary  books  are  books  containing  records 
and  reminders  to  aid  in  the  conduct  of  the  business,  but 
nothing  that  is  to  be  posted.  They  have  no  articu- 
lation with  the  posting  books,  and  can  be  added  to  or 
dropped  from  an  office  system  when  desired.  Some 
common  auxiliary  books  are  mentioned  here : 

The  notes  or  bills  receivable  book  is  arranged  for  re- 
cording notes  and  accepted  time  drafts  receivable.  Each 
item  is  described  on  one  writing  line  divided  into  spaces 
to  show  the  note  number,  maker's  or  payer's  name,  to 
whom  given,  date  of  paper,  term,  maturity,  rate  of  inter- 
est, and  other  description,  if  any. 

The  number  in  the  record  is  written  on  the  note,  and 
the  note  is  thereafter  referred  to  by  number.  This 
book  exhibits,  in  compact  form,  the  information  about 
all  notes  held  by  the  concern.  Where  notes  are  re- 
ceived only  at  intervals,  there  is  no  very  good  reason 
for  connecting  this  book  with  the  posting  books,  as  the 
posting  entries  can  be  made  direct  from  the  transactions. 
But  when  notes  are  received  actively,  it  is  better  to  make 
this  a  posting  rather  than  an  auxiliary  book  and  transfer 
the  debit  to  Notes  Receivable  from  it  by  daily  totals,  as  is 
done  in  banks.  (See  Prin.  78.)  When  the  collections 
from  payment  of  notes  are  very  active,  the  credits  of 
Notes  Receivable  may  be  posted  to  the  bill  book  from  the 
cash  book,  thus  making  the  notes  receivable  book  a  sub- 
sidiary ledger,  called  the  note  ledger. 

The  notes  payable  book  is  similar  to  the  notes  re- 
ceivable book  and  is  governed  by  the  same  considera- 
tions. 

A  tickler  is  a  book  subdivided  into  spaces,  each  space 
to  contain  memoranda  of  the  maturities  payable  or  re- 
ceivable on  a  given  date.     The  spaces  are  dated,  begin- 

144 


AUXILIARY  BOOKS  145 

ning  with  January  1,  January  2,  etc.,  and  extend  through 
the  entire  year.  A  memorandum  of  a  note  or  other 
obligation  due  on  a  future  date,  is  placed  in  the  space 
reserved  for  that  date.  Maturities  receivable  may  be 
written  in  black  ink  and  maturities  payable  in  red  ink, 
to  distinguish  them.  This  book  is  merely  a  reminder 
kept  for  daily  reference  in  order  that  no  collection  or 
payment  may  be  overlooked.  When  the  items  are  at- 
tended to,  they  may  be  checked  off. 

A  very  practical  form  of  tickler  for  use  when  the  items  of 
any  one  day  are  not  very  numerous,  consists  of  a  chart,  ruled  in 
twelve  vertical  columns,  and  thirty-one  horizontal  lines.  The  ver- 
tical columns  should  be  headed  by  the  months  beginning  with 
January,  ending  with  December.  The  lines  should  be  numbered 
1,  2,  3,  etc.,  to  31,  to  allow  one  line  on  the  page  for  each  day  of 
the  month.  Reminders  for  given  dates  during  the  year  can  be 
written  in  at  the  intersection  of  the  lines  and  the  vertical  col- 
umns; thus  a  reminder  for  April  10,  would  be  written  where  the 
fourth  vertical  column  crosses  the  tenth  horizontal  line. 

The  advertising  list  is  a  book  containing  addresses 
or  information  about  prospective  or  regular  customers  to 
whom  advertising  matter  is  sent.  The  addresses  are  ar- 
ranged on  the  scheme  of  classification,  either  by  surnames 
or  towns,  alphabetically  arranged  throughout  the  entire 
list,  or  arranged  by  states,  or  by  other  geographical  sec- 
tions. Such  lists  must  be  constantly  revised,  by  adding 
new  addresses,  and  by  dropping  off  addresses  of  un- 
desirable firms.  Care  in  keeping  this  list  correct  and 
reliable  is  usually  appreciated  by  any  business  manager. 

Any  list  that  is  being  constantly  revised,  by  adding 
or  dropping  names,  is  most  advantageously  kept  on  cards, 
one  card  for  each  name. 

The  customers'  liability  ledger  is  an  auxiliary  book 
in  which  a  credit  man  enters  such  information  as  he 
gathers  concerning  the  debits  already  contracted  by  cus- 
tomers. The  facts  therein  recorded  are  of  value  to  him 
in  determining  the  amount  of  credit  to  be  allowed  in 
future  dealings. 

There  are  many  kinds  of  auxiliary  books.  Their 
scope  and  general  purpose  may  be  gathered  from  the 
foregoing  examples. 


CHAPTER  XX 

THE  LEDGER 

80.  In  this  division  we  discuss  the  ledger  with  ref- 
erence to  its  use  by  the  bookkeeper.  The  ledger  plan  of 
accounts  has  been  discussed  in  Prin.  21-21  C. 

The  ledger  may  contain  all  of  the  accounts  of  the 
business  in  one  cover,  or  it  may  be  divided  into  several 
books  each  containing  a  certain  section  of  the  accounts. 
(Prin.  80B-C.) 

The  ledger  may  consist  of  a  bound  book,  a  loose-leaf 
book,  or  a  case  of  cards.  Each  of  these  forms  have  ad- 
vantages depending  upon  conditions.     (Prin.  80F-G-H.) 

Whatever  the  form,  a  bookkeeper  should  carefully 
consider  the  makeup  of  his  ledger  in  order  to  provide  for 
(1)  A  convenient  arrangement  of  accounts  for  posting, 
making  trial  balances,  and  statements  (Prin.  80  B) ;  (2) 
sufficient  space  for  all  entries  likely  to  be  made  (Prin. 
80 1) ;  (3)  indexing  of  accounts  for  prompt  reference 
(Prin.  80  E) ;  (4)  size  and  binding  to  suit  the  kind  and 
number  of  accounts. 

80  B.  The  Complete  Ledger  contains  all  of  the  ac- 
counts in  one  book,  with  the  exception  of  the  cash  account 
when  the  latter  is  kept  in  a  cash  book. 

In  the  ordinary  arrangement,  real  accounts  come 
first  and  the  nominal  accounts  follow. 

The  part  containing  the  real  accounts  comprises  the 
section  of  assets  and  liabilities  with  their  summaries  in 
proprietorship  accounts,  and  the  part  containing  the 
nominal  accounts,  the  section  of  incomes  and  expenses 
with  their  summaries  in  the  Profit  and  Loss  account. 
These  two  parts  belong  in  one  book,  although  occasions 
arise  where  they  are  kept  under  separate  book  covers. 

In  the  first  section,  the  asset  accounts  are  placed 
first,  these  being  followed  by  the  liability  accounts.  Of 
the  asset  accounts,  the  quick  assets  are  given  first  place, 

146 


THE  LEDGER  147 

followed,  in  order,  by  the  assets  less  easily  convertible 
into  cash;  then  come  those  most  remotely  convertible, 
and  finally  those  that  are  not  convertible  at  all.  Follow- 
ing these  are  liability  accounts,  in  like  order,  followed 
by  proprietorship  accounts. 

In  the  second  section,  the  order  of  accounts  is  not 
so  easily  outlined,  owing  to  the  great  diversity  in  kinds 
of  income  and  expense.  The  following  order  is  good  in  a 
trading  or  manufacturing  ledger:  (1)  Sales,  together 
with  any  accounts  that  close  into  sales,  such  as  Return 
Goods,  Allowances,  Sales  Discount;  (2)  Purchases,  Manu- 
factures, or  other  accounts  showing  cost  of  sales;  (3) 
Trading,  in  which  Nos.  1  and  2  are  combined  to  show 
gross  profit;  (4)  Business  Expenses;  (5)  Secondary  In- 
comes and  Expenses;  (6)  Profit  and  Loss. 

Note. — In  a  complete  ledger,  it  is  not  easy  to  reserve  space 
for  the  accounts  payable  and  receivable  in  the  order  given  above, 
although  that  is  the  order  occupied  by  them  in  a  financial  state- 
ment, or  by  their  controlling  accounts  in  a  general  ledger  (Prin. 
80  C).  For  this  reason,  accounts  payable  and  receivable  are  given 
the  remainder  of  the  ledger,  following  the  Profit  and  Loss  account, 
the  accounts  payable  being  given  a  number  of  pages  that  can  ordi- 
narily be  determined,  and  the  accounts  receivable  all  of  the 
remainder. 

80  C.  General  and  Subsidiary  Ledgers.  As  a  busi- 
ness increases  in  volume,  it  becomes  more  satisfactory  to 
divide  the  complete  ledger  into  one  general  ledger  and 
one  or  more  subsidiary  ledgers. 

A  subsidiary  ledger  contains  any  group  of  accounts 
of  the  same  class,  when  the  accounts  are  too  numerous 
to  find  place  in  a  complete  ledger.  Thus,  all  the  ac- 
counts receivable  may  be  placed  in  a  subsidiary  ledger; 
likewise,  the  accounts  payable,  the  accounts  of  notes  re- 
ceivable, of  notes  payable,  of  shipments,  of  consignments, 
of  mortgage  loans,  and  other  kinds  of  accounts,  as  they 
become  numerous,  may  be  taken  from  the  complete  led- 
ger and  placed  in  separate  subsidiary  ledgers. 

When  a  subsidiary  ledger  is  kept,  this  ledger  is 
represented  in  the  general  ledger  by  a  controlling  ac- 
count. This  is  an  account  that  shows  the  aggregate  of 
debits  and  credits  posted  to  a  subsidiary  ledger.     The 


148  RULES 

aggregates  of  postings  to  subsidiary  ledgers  are  usually 
computed  and  posted  to  the  controlling  accounts  monthly. 
By  including  these  aggregates  found  in  the  controlling 
accounts,  a  trial  balance  of  the  general  ledger  may  be 
taken  without  reference  to  the  subsidiary  ledgers. 

A  separate  list  of  the  accounts  open  in  any  subsid- 
iary ledger  is  verified  by  comparing  the  total  balances  of 
accounts,  with  the  balance  of  the  subsidiary  ledger's 
controlling  account  in  the  general  ledger,  and  should 
equal  it.  The  following  paragraphs  explain  in  detail 
the  kinds  of  accounts  that  would  be  taken  out  of  the 
complete  ledger  and  placed  in  subsidiary  ledgers  or  other 
books  having  the  same  relation  as  subsidiary  ledgers. 
These  accounts  are  considered  in  about  the  order  that 
would  probably  be  followed  in  taking  them  out  of  the 
complete  ledger  because  of  expanding  business. 

80  D.  Cash  entries  are  ordinarily  entered  in  a  cash 
book,  instead  of  in  the  cash  account  of  a  ledger.  Fre 
quently  a  controlling  account,  entitled  Cash,  is  kept  in 
the  general  ledger.  To  this  controlling  account,  the 
bookkeeper  posts  monthly,  charging  the  total  cash  re- 
ceipts and  crediting  the  total  payments.  In  taking  a 
trial  balance,  the  balance  of  the  controlling  account  can 
conveniently  be  used,  instead  of  referring  to  the  cash 
book  itself. 

It  is  usual,  however,  to  regard  the  cash  book  as 
an  account,  under  separate  cover,  yet  belonging  to  the 
general  ledger  and  requiring  no  controlling  account. 
When  thus  kept,  a  trial  balance  would  require  that  the 
balance  be  taken  from  the  cash  book,  along  with  the  bal- 
ances of  the  accounts  found  in  the  ledger. 

Accounts  receivable  may  be  kept  in  a  subsidiary 
ledger  called  "Accounts  Receivable  Ledger,' '  "Custom- 
ers' Ledger,"  "Sales  Ledger,"  or  some  similiar  name, 
and  the  controlling  account  may  be  entitled,  Accounts 
Receivable,  Trade  Debtors,  or  the  tijtle  may  be  the  name 
of  the  ledger  itself. 

The  customers'  debits  are  posted  to  the  customers' 


THE  LEDGER  149 

accounts  in  the  subsidiary  ledger,  and  the  monthly  totals 
of  these  debits  are  posted  to  the  debit  of  the  controlling- 
account  in  the  general  ledger.  The  customers '  credits 
for  the  month  are  posted  to  the  customers'  accounts  in 
the  subsidiary  ledger,  and  the  monthly  totals  of  the 
credits  are  posted  to  the  credit  of  the  controlling  account 
in  the  general  ledger. 

Accounts  Payable,  Notes  Receivable,  Notes  Payable, 
Capital  Stock,  Consignments,  Shipments,  Agents'  Ac- 
counts, Branch  Store,  are  some  of  the  controlling  ac- 
counts that  may  be  kept  in  general  ledgers  to  represent 
the  named  classes  of  accounts  kept  in  subsidiary  ledgers, 
as  explained' in  detail  in  foregoing  paragraphs. 

80  E.  The  Index.  The  page  of  a  ledger  account  is 
promptly  located  by  means  of  an  index.  The  index  may 
be  one  or  more  sheets  bound  in  the  ledger,  on  which  the 
account  titles,  followed  by  the  ledger  page,  are  written 
in  alphabetical  order  (Form  12  B) ;  or  it  may  be  a  whole 
book  in  itself  with  capacity  for  as  many  as  100,000 
names.  In  large  books  the  names  are  arranged  accord- 
ing to  the  first  two  or  three  letters  of  the  surname,  as 
are  the  words  in  a  dictionary. 

The  bookkeeper  should  make  it  a  rule  to  index  each 
account  when  it  is  opened. 

Loose-leaf  and  card  ledgers  often  do  not  require  any 
index,  because  the  sheets  or  cards  can  be  arranged  in 
alphabetical  order,  enabling  one  to  locate  an  account 
from  its  place  in  the  ledger  without  need  of  a  special 
index. 

80  F.  Bound  Ledger.  The  bound  ledger,  under 
certain  conditions,  has  advantages  over  the  loose-leaf  or 
card  ledger. '  It  is  especially  good  as  a  general  ledger,  for 
this  book  contains,  in  the  main,  monthly  summaries, 
which  do  not  require  much  space,  but  which  are  used  for 
reference  long  after  their  date.  A  bound  general  ledger 
can  be  arranged  to  last  through  the  entire  history  of  a 
business.  If  all  the  leaves  remain  in  a  bound  book,  we 
can  easily  assume  that  the  records  are  intact. 


150  RULES 

A  bound  complete  ledger  of  a  small  business  is  often 
better  than  the  loose-leaf  form,  because  it  costs  less,  does 
not  require  any  transfer  apparatus,  and  can  be  kept  in 
one  cover.  This  is  worth  considering,  especially  in  an 
office  not  well  provided  with  conveniences  for  the  safe- 
keeping of  office  books  and  papers. 

80  G.  The  Loose-Leaf  Ledger  consists  of  a  binder, 
and  the  sheets,  the  latter  being  securely  fastened  in, 
although  removable  at  pleasure.  Since  the  leaves  can  be 
rearranged  so  as  to  keep  them  in  any  desired  order,  the 
loose  leaf  ledger  has  replaced  the  bound  ledgers  wherever 
a  given  order  of  accounts  is  to  be  adhered  to  in  either 
general  or  subsidiary  ledgers.  Subsidiary  ledgers 
especially  contain  many  accounts  which  may  either  ex- 
tend unexpectedly  over  several  pages  of  space,  or  else 
may  be  closed  at  any  time.  A  bookkeeper  would  not  find 
it  convenient  to  have  a  great  many  closed  accounts*  filling 
the  working  ledger,  nor  can  he,  in  the  case  of  an  account 
that  has  overrun  the  space  provided  for  it,  conveniently 
forward  it  to  any  odd  page  where  he  might  happen  to 
find  room,  as  was  done  before  loose-leaf  ledgers  were 
used.  Also,  it  adds  considerably  to  a  bookkeeper's  work 
to  index  numerous  accounts  and  afterward  have  to  locate 
them  through  the  index.  With  a  loose-leaf  ledger,  the 
bookkeeper  can  remove  closed  accounts  entirely,  thus 
keeping  the  whole  ledger  for  active  accounts.  If  an  ac- 
count runs  over  the  leaf  provided  for  it,  another  leaf  can 
be  inserted  and  the  account  continued.  The  bookkeeper 
can  file  all  removed  leaves  in  Transfer  Binders.  This  is 
considered  care  sufficient  for  settled  accounts  that  are 
kept  merely  for  reference  in  the  matter  of  future  credit 
information.  As  the  transferred  accounts  can  be  inserted 
where  desired,  they  may  be  in  alphabetical  order  by  sur- 
names ,or  towns,  or  in  any  other  order  that  may  be  more 
convenient  for  self-indexing. 

80  H.  The  Card  Ledger  consists  of  ledger  accounts 
kept  on  cards  of  suitable  size  and  arranged  in  drawers. 
The  cards  can  be  arranged  on  any  plan  possible  with  a 
loose-leaf  system,  and  are  more  easily  sorted  from  one 


THE  LEDGER  151 

division  to  another.  When  there  are  a  great  many  ac- 
counts, and  it  is  desired  to  make  statements,  or  otherwise 
go  over  them  in  a  very  short  time,  the  cards  can  be  di- 
vided among  many  clerks,  who  can  each  do  his  share  of 
the  work,  and  thus  complete  the  whole  quickly.  The 
card  ledger  is  convenient  for  transient  accounts,  which 
are  to  be  referred  to  by  a  number  of  persons  at  the  same 
time,  during  the  day's  transactions.  It  is  also  convenient 
for  accounts  with  customers  who  are  moving  about  in 
territories  for  which  separate  sales  ledgers  are  kept. 

80 1.  Space  for  Ledger  Accounts.  If  a  bound  ledger 
is  to  be  opened,  consider  the  number  of  pages  in  the  entire 
ledger  and  divide  that  space  among  the  accounts,  giving 
each  account  the  number  of  pages  you  think  it  will  need 
by  the  time  the  entire  ledger  is  filled.  If  you  have  a 
former  ledger  to  guide  you,  allow  space  as  seems  justi- 
fied by  past  experience.  In  assigning  account  space  in 
a  general  ledger,  remember  that  controlling  accounts,  as 
a  rule,  are  posted  but  once  a  month,  so  that  from  one  to 
three  lines  per  month  will  suffice.  On  a  basis  of  three 
lines  per  month,  36  lines  would  be  enough  for  a  year,  or 
360  lines  for  10  years.  This  can  easily  be  reduced  to 
pages.  Other  accounts  may  require  more  or  less 
guessing. 

If  loose-leaf  or  card  ledgers  are  used,  allow,  as  a  rule, 
one  account  for  each  leaf  or  card,  inserting  additional 
leaves  or  cards  as  needed. 

80  J.  Posting  to  Ledgers.  Posting  comprises  a 
large  part  of  the  bookkeeper's  work.  Any  plans  that 
promise  increased  accuracy  or  certainty  are  worth  con- 
sidering, because  they  may  save  time.  Bad  methods  of 
posting,  or  the  absence  of  a  method,  may  become  a  habit 
with  a  bookkeeper,  causing  the  loss  of  hundreds  of  hours 
of  his  time  in  the  course  of  a  year,  and  greatly  diminish- 
ing his  earning  power. 

When  a  bookkeeper  does  not  know,  from  location 
or  from  memory,  the  pages  of  his  ledger  accounts,  the 
following  method  will  save  time  and  mental  effort.     Be- 


152  RULES 

fore  beginning  to  post,  write,  from  the  index,  the  account 
pages  in  the  postmark  columns  of  the  posting  books, 
opposite  all  amounts  to  be  posted.  Then  post  all  debits, 
beginning  with  the  first  pages  of  the  ledger  and  progres- 
sing to  the  last,  so  far  as  this  can  be  done  on  a  single 
page  of  the  posting  book.  Indicate  posting  by  a  check 
mark.  It  is  not  a  very  good  plan  to  write  page  figures 
in  the  posting  books  during  the  process  of  posting,  be- 
cause the  page  figures  (relatively  unimportant)  would 
receive  attention  when  the  mind  should  be  highly  con- 
centrated upon  the  smallest  possible  area  of  effort.  Try 
to  carry  as  little  as  possible  in  mind,  except  what  you  are 
actually  writing  in  the  ledger,  and  where  you  are  writ- 
ing it.  The  figures  must  be  absolutely  correct  and  placed 
in  the  right  accounts.  After  you  have  posted  all  debits, 
glance  back  over  all  pages  of  the  posting  book,  to  see 
that  no  entry  has  been  overlooked.  If  you  always  make 
the  check  mark  immediately  after  posting  the  entry, 
you  c  know  that  the  omission  of  a  check  mark  means 
a  failure  to  post  the  item  not  checked. 

Post  the  credits  in  the  same  way.  Remember  that 
in  posting,  the  habit  of  doing  the  same  process  in  the 
same  way  is  your  best  protection  against  errors.  If  you 
are  not  methodical,  you  may  make  a  slip  in  posting,  in  a 
second,  that  will  cause  you  hours  to  discover. 

If  you  know  the  pages  of  the  ledger  accounts,  or  if 
you  use  a  self-indexing  ledger,  it  is  a  waste  of  time  to 
place  the  ledger  pages  in  the  post  mark  column  of  the 
posting  book.     A  check  mark  is  sufficient. 

80  K.  Verifying  the  Posting.  After  all  debits 
and  credits  are  posted  to  the  accounts  in  a  double  entry 
ledger,  it  is  customary  to  verify  the  work  monthly,  or 
oftener  if  thought  advisable.  Since  the  sum  of  all 
debits  is  equal  to  the  sum  of  all  credits  in  the  posting 
book,  it  follows  that  after  the  posting  is  completed,  you 
must  have  posted  an  equal  aggregate  of  debits  and 
credits  into  the  ledger  accounts;  that  is,  that  you  have 
not  disturbed  the  equality  of  the  total  ledger  debits  and 


THE  LEDGER  153 

credits.  The  ordinary  proofs  of  posting  are  given  in 
Prin.  .80  L-M. 

80  L.  A  Proof  Sheet  is  the  easiest  means  of  assur- 
ance that  the  ledger  is  in  balance.  This  consists  of 
a  list  of  all  the  debit  and  credit  account  footings  ar- 
ranged in  two  columns.  The  equal  totals  of  debit 
and  credit  columns  tend  to  show  that  there  was  no  over- 
sight in  posting  the  entries.  (See  Form  12 1.)  The 
proof  sheet  is  quickly  taken  on  two-column  paper,  or,  if 
an  adding  machine  is  at  hand,  by  listing  the  debits  first, 
then  the  credits.  »   ' 

80  M.  The  Trial  Balance  is  a  list  of  the  open  ac- 
count titles,  with  the  balance  of  each  account  placed  in 
either  the  left  or  the  right  column  accordingly  as  it  is 
a  debit  or  a  credit  balance.  To  make  a  trial  balance 
requires  more  time  than  to  make  a  proof  sheet  because 
it  is  necessary  to  compute  the  balances  of  the  accounts, 
whereas,  in  the  proof  sheet  only  the  totals  are  used.  The 
equality  of  debit  and  credit  totals  in  the  trial  balance, 
shows  the  ledger  to  be  in  balance. 

Some  account  totals  of  a  statistical  nature,  as  well 
as  such  account  balances,  may  be  of  interest  to  the  one 
who  examines  a  trial  balance.  Such  totals  may  be  placed 
in  the  explanatory  space  before  the  money  columns,  as 
illustrated  in  Form  12  J. 

Note. — A  great  many  accountants  call  a  list  of  account  titles 
with  the  debit  and  credit  totals  (instead  of  the  debit  or  credit 
balances)  a  trial  balance.  As  a  matter  of  convenience  in  the  dis- 
cussions arising  in  this  book,  the  term  "trial  balance"  should  be 
taken  to  mean  a  trial  balance  of  account  balances,  otherwise  the 
term  "proof  sheet"  or  "trial  balance  of  totals"  is  used. 

80  N.  When  the  Trial  Balance  Does  Not  Foot 
Equally.     (See  Prin.  83  C.) 

80  O.  Closing  the  Ledger  involves  three  important 
steps:  (1)  the  re-adjustment  of  the  real  accounts  so  as 
to  exhibit  the  assets  and  liabilities  of  the  business  at  their 
revised  valuation  at  the  close  of  the  period;  (2)  the  trans- 
fer of  the  balances  of  the  nominal  accounts  into  Profit 
and  Loss,  which  shows  as  a  result  a  net  profit  or  a  net 


154  RULES 

loss;   (3)  the  distribution  of  the  net  profit  or  loss  into 
such  accounts  as  may  be  determined  by  the  owners. 

The  various  steps  of  ledger  closing  are  given  in  Prin. 
72  P-72  R. 

80  P.  Readjustment  of  Accounts.  "When  closing  the 
ledger,  the  following  readjustments  should  be  made  as  far 
as  applicable: 

The  debit  balance  standing  in  Inventory  account 
from  the  beginning  of  the  period  should  be  carried  to 
operating  accounts  as  illustrated  in  Prin.  72  G,  Ex- 
ample 31. 

The  inventories  taken  at  time  of  closing  should  be 
debited  in  Inventory  account  and  credited  in  operating 
accounts  as  illustrated  in  Prin.  72  G,  Example  32. 

The  credit  balance  standing  in  the  Liability  Inven- 
tory account  should  be  carried  to  operating  accounts,  as 
illustrated  in  Prin.  72  G,  Example  33. 

The  liability  inventories  taken  at  time  of  closing 
should  be  debited  in  operating  accounts  and  credited  in 
Liability  Inventory  account,  as  illustrated  in  Prin.  72  G, 
Example  34. 

The  depreciation  for  the  period  should  be  debited  in 
operating  accounts  and  credited  in  reserve  or  property 
accounts,  as  illustrated  in  Prin.  72  G,  Example  35. 

80  Q.     Closing  Nominal  Accounts.     After  readjust 
ment,   all  nominal  account  balances  should  be  carried, 
either  indirectly  as  when  Inventory,  Purchases  and  Sales 
are  closed  into  Trading,  which  in  turn  is  closed  into  Profit 
and  Loss,  or  directly  into  Profit  and  Loss. 

Profit  and  Loss  should  be  closed  into  an  account  or 
accounts  of  proprietorship. 

After  closing,  all  nominal  accounts  should  be  ruled. 

80  R.  Balancing  Real  Accounts.  The  closing  of  the 
ledger  does  not  necessitate  balancing  the  real  accounts, 
but  it  is  advisable  to  balance  cash,  accounts  of  proprietor- 
ship, and  all  controlling  accounts. 

Accounts  in  which  property  is  listed  should  not  be 
balanced,  but  remain  open  until  the  property  is  dis- 
posed of. 


CHAPTER  XXI 

AUDITING 

81.  Auditing  involves  a  review  of  books  and  rec- 
ords with  attention  to  their  supporting  vouchers,  or 
other  evidences  of  their  correctness,  accuracy  or  ade- 
quacy for  the  purpose  intended. 

The  special  purposes  of  an  audit  may  be  either  one 
or  more  of  the  following: 

(1).  To  prove  the  mechanical  and  mathematical  >ac- 
curacy  of  a  set  of  books.     (Prin.  83.) 

(2).  *  To  show  that  the  entries  and  accounts  are  true 
records  of  actual  transactions  and  existing  values. 
(Prin.  84.) 

(3).  To  show  fraud,  or  absence  of  fraud,  on  the  part 
of  officers  or  other  employes  of  the  business.     (Prin.  85.) 

(4).  To  show  that  books  and  records  kept  are  suit- 
able, economical  and  complete.     (Prin.  86.) 

(5).  To  show,  or  to  verify,  an  exhibit  of  the  worth 
of  the  business  and  its  earning  power,  for  the  benefit  of 
the  owners  or  of  prospective  investors.     (Prin.  87.) 

81  B.  A  general  auditor  should  be  a  bookkeeper,  ac- 
countant and  business  man,  well  informed  in  commercial 
law  and  business  mathematics ;  and  withal,  have  a  faculty 
of  applying  sound  business  principles  to .  existing  con- 
ditions. 

A  special  auditor  should  be  familiar  with  the  business, 
books  and  conditions  of  the  particular  concern  which 
he  is  to  audit. 

In  making  an  audit,  there  is  a  certain  order  of  pro- 
cedure to  be  followed,  as  in  all  other  matters  pertaining 
to  business  records.  To  follow  this  order  may  be  all  that 
is  necessary,  or  it  may  be  only  the  beginning  for  addi- 
tional investigations,  which  may  be  found  necessary  be- 
cause of  the  insufficiency  of  the  records  at  hand. 

A  bookkeeper  may  keep  a  set  of  books  in  such  a  way 

155 


156  RULES 

that  an  audit  is  merely  a  formality,  or  they  may  be  kept 
in  such  a  way  that  an  auditor  will  be  obliged  to  rewrite 
the  records  from  the  start.  Good  bookkeeping  is  the  fore- 
runner of  inexpensive  auditing. 

82.  General  Conditions.  Before  undertaking  an 
audit,  the  auditor  should  determine  whether  his  examina- 
tion is  to  cover  the  entire  period  from  the  beginning  of 
a  business;  or  from  a  given  date.  If  an  audit  between 
given  dates  is  undertaken,  the  prior  records  are  the  sub- 
ject of  inquiry  only  as  they  affect  the  audit  period. 

82  B.  The  auditor  should  first  determine  the  pur- 
pose of  the  audit,  which  may  be  one  or  more  of  the  five 
purposes  specified  in  Prin.  81.  His  preparation  should 
be  in  accordance  with  the  purpose. 

82  Q.  The  auditor  should  study  the  conditions  of  the 
business  and  estimate  the  volume  and  kind  of  its  business 
operations,  consider  the  ordinary  terms  of  purchase  and 
sale,  investigate  manufacturing  processes,  if  any,  and  the 
conditions  under  which  the  business  is  operated.  He 
should  then  make  an  outline  of  a  system  of  accounts  and 
books  suitable  for  the  business.  Having  in  mind  what 
the  books  should  be,  and  what  they  should  show,  he 
should  make  a  complete  list  of  the  books  that  actually 
are  kept,  separating  the  principal  books  from  the  aux- 
iliary books. 

82  D.  An  auditor  should  prepare  a  record,  setting 
forth  his  agreement  as  to  the  general  conditions  of  the 
audit,  and  covering  the  important  matters  connected 
therewith. 

An  auditor's  record  may  contain  abstracts  from  the 
books;  totals,  proofs,  and  computations  to  verify  the 
books;  or  it  may  extend  to  an  entire  re-writing  of  the 
books ,  in  skeleton  form,  from  the  original  data.  It 
should  be  so  arranged  as  to  exhibit  any  vital  points  that 
are  not  brought  out  in  the  bookkeeper's  records. 

82  E.  The  amount  and  kind  of  work  demanded  of  an 
auditor  depends  on  the  amount  and  kind  of  work  pre- 
viously done  by  the  bookkeeper.  His  researches  may  in- 
clude the  following:     (1)    A  rearrangement  of  vouchers 


AUDITING  157 

and  substitution  of  missing  vouchers;  (2)  a  comparison 
of  the  cash  account  with  the  bank  account;  (3)  a  com- 
parison of  the  accounts  of  customers  and  creditors  with 
the  book  records  of  the  persons  with  whom  the  accounts 
are  kept;  (4)  a  comparison  of  the  account  of  invoices 
with  the  goods  actually  received;  (5)  the  substitution  of 
a  correct  account  analysis  for  a  faulty  one. 

83.  The  Audit  for  Mechanical  and  Mathematical 
Accuracy  is  to  show  that  transactions  have  been  properly 
entered;  that  the  proper  accounts  have  been  correctly 
debited  and  credited ;  and  that  the  resultant  trial  balance 
is  correct.    Proceed  as  directed  in  83  B  to  83  D. 

83  B.  Compare  the  vouchers  with  the  entries.  The 
vouchers  consist  of  invoices,  receipts,  legal  papers,  charge 
and  credit  tickets  made  in  the  office,  or  any  other  support- 
ing records.  A  note  should  be  made  of  any  entries  for 
which  no  vouchers  are  found.  They  should  be  supplied, 
if  practicable,  or  attention  to  their  absence  should  be 
called  in  the  auditor's  record. 

83  0.  When  the  proof  sheet  or  the  trial  balance  does 
not  foot  equally,  there  is  an  error  in  the  ledger  or  in  the 
proof  sheet,  or  there  may  be  several  errors  to  be  discov- 
ered. If  the  bookkeeper  has  been  careful  and  accurate, 
and  has  reviewed  all  footings  and  transfers  to  the  trial 
balance,  and  if  the  audit  period  is  short,  one  may  proceed 
on  the  assumption  that  the  discrepancy  is  in  one  item,  or 
at  the  outside,  very  few  items.  To  locate  these,  proceed 
as  follows: 

(1).  Find  which  side  of  the  ledger  is  short  and  thr* 
amount  of  the  discrepancy. 

(2).  If  the  error  is  a  number  like  1,  10,  100,  1000, 
or  contains  a  single  figure  with  or  without  ciphers,  revieyv 
the  additions. 

(3).  Review  post  marks  on  the  short  side,  to  dis- 
cover any  omissions  in  posting. 

(4).  Look  for  the  exact  amount  of  the  discrepancy 
on  the  short  side  of  any  posting  books.  An  entry  may 
have  been  overlooked  in  posting. 


158  RULES 

(5).  Look  on  the  short  side  of  the  posting  books  for 
one-half  of  the  discrepancy  (if  any  even  number)  which 
may  have  been  posted,  by  mistake,  to  the  long  side. 

(6).  If  the  discrepancy  is  divisible  by  9,  any  of  sev- 
eral transpositions  may  be  suspected;  thus,  29  for  92, 
discrepancy  63;  $51.60  for  $60.51,  discrepancy  $8.91; 
$29.64  for  $24.69,  discrepancy  $4.95 ;  10  cts.  for  $10,  dis- 
crepancy $9.90,  etc.  In  looking  for  a  discrepancy  in  the 
cents  column,  give  no  attention  to  figures  in  the  dollars 
column. 

(7).  See  if  the  ledger  was  out  of  balance  at  the 
beginning  of  the  audit  period.  This  can  be  found  by 
comparing  the  accounts,  as  they  formerly  stood,  with  the 
last  previous  trial  balance,  if  there  was  one.  It  has  hap- 
pened many  times  that  an  error  in  a  previous  trial  balance 
was  discovered,'  corrected  in  the  trial  balance,  but  not  in 
the  ledger  account,  with  the  result  that  the  next  subse- 
quent trial  balance  was  wrong. 

(8).  See  if  the  posting-books  are  in  balance  for  the 
audit  period.  A  journal,  sales  book,  cash  book,  voucher 
register,  or  other  posting-book  (especially  if  it  has  many 
columns)  may  not  be  in  balance  as  to  debits  and 
credits,  with  the  result  that  the  ledger,  after  posting, 
could  not  possibly  balance. 

(9).  Check  back  the  entries.  This  means  to  review 
every  item  posted  during  the  period.  Although  checking 
back  probably  involves  more  labor  than  all  of  the  above 
methods,  it  may  often  be  advisable  to  do  this  first, 
especially  if  the  bookkeeper's  work  is  evidently  lax  or 
careless.  Note  that  it  is  unnecessary  to  check  back  the 
work  if  the  method  in  Prin.  83  D  is  followed. 

To  check  back,  arrange  all  posting  books  in  a  given 
order,  and,  as  a  rule,  check  first,  through  all  the  posting 
books,  the  entries  that  have  been  posted  to  the  short 
side.  Place  a  check-mark  before  each  amount  in  both 
posting  book  and  ledger,  using  a  mark  that  is  different 
in  kind  or*  color  from  any  used  before. 

If  no  errors  are  found  in  the  short  side,  check  back 
the  long  side. 


AUDITING  159 

If  an  error  is  found  at  any  time,  subtract  it  from  or 
add  it  to  the  amount  of  the  first  discrepancy,  so  that  the 
figures  of  the  amount  sought  are  always  in  mind. 

If  the  discrepancy  is  not  found  by  checking,  review 
the  ledger  to  see  if  there  are  any  amounts,  within  the 
audit  period,  which  have  not  been  checked. 

This  procedure  should  result  in  a  balance. 

83  D.  Though  a  trial  balance  may  be  taken,  there 
remains  a  question  whether  all  items  were  posted  into 
the  right  accounts.  A  trial  balance  or  proof  sheet  will 
not  determine  this  question,  as  the  auditor  while  doing 
the  checking  is  occupied  with  pages  )and  amounts,  and 
is  likely  to  overlook  titles.  If  the  accounts  are  to  be 
proved,  it  will  not  be  necessary  to  check  back,  but  to  go 
directly  to  the  abstract  of  the  accounts.  This  is  written 
on  analysis  sheets,  or  paper  ruled  with  pairs  of  columns 
(debit  and  credit),  as  many  as  the  page  will  hold,  in 
which  the  amounts  from  the  posting  books  are  carried. 

Transfer  the  account-titles  from  the  ledger  to  the 
columns  in  the  abstract  of  accounts,  leaving  as  much 
space  below  each  title  as  the  entries  under  this  title  will 
require  when  written  in  closely.  To  aid  in  locating  per- 
sonal accounts,  which  may  be  numerous,  place  them  in 
alphabetical  order,  since  the  comparison  is  to  be  by  titles, 
not  by  pages. 

The  general  accounts  will  be  easily  located  without 
re-arrangement  if  they  are  in  proper  order;  if  not,  re- 
arrange them.     (See  Prin.  21.) 

Carry  all  amounts  from  the  trial  balance  at  the  be- 
ginning of  the  audit  period,  and  all  amounts  during  the 
period  from  the  posting  books  to  the  abstract. 

The  results  should  balance  when  the  posting  is  fin- 
ished, and  each  item  in  the  abstract  of  accounts  should 
agree  with  the  ledger. 

84.  An  Audit  to  Show  True  Record  goes  into  the 
matter  of  the  first  entries  to  determine  whether  they 
are  the  records  of  actual  transfers  of  value  to  the  person 
or  department  charged.  This  is  not  entered  into  with  a 
view   to    discovering   fraudulent   intentions,   but   to    de- 


160  RULES 

termine  whether  there  is  any  business  laxity  or 
failure  to  exact  full  value  for  any  of  the  obliga- 
tions or  payments.  The  following  are  examples  of 
this  kind  of  items:  (1)  entries  for  invoices  before 
receipt  of  the  goods  billed,  or  before  the  amounts  of  the 
invoice  are  verified,  or  before  any  allowances  against  the 
bill  are  noted;  (2)  the  charge  of  an  invoice  to  the  wrong 
department;  (3)  cash  payments  for  something  that  was 
not  received;  (4)  donations  of  the  firm's  funds  to  char- 
itable ends,  by  individuals  in  the  firm,  or  the  taking  of 
firm  goods  for  personal  use  by  partners;  akin  to  this, 
is  the  action  of  the  bank  teller  who,  on  days  when  cash 
was  "over,"  placed  the  surplus  in  a  box,  to  be  returned 
to  the  till,  on  days  when  cash  was  "short;"  (5)  laxity 
in  collections,  allowing  claims  to  become  outlawed  or 
otherwise  uncollectible.  Serious  irregularities  along  this 
line  may  be  the  entry  of  assets  which  do  not  exist,  or 
which  have  not  the  value  shown  on  the  ledger.  There 
might  be  entries  of  real  property  of  great  value,  to  which 
the  firm  has  no  recorded  title,  or  against  which  there  are 
liabilities  not  shown  on  the  books.  Obsolete  patterns, 
models  and  machinery,  may  be  carried  on  the  books  at  a 
t  nominal  value,  after  they  are  worthless.  Any  injury  to 
property  by  fire  or  accident  must  also  be  charged  off. 

Ordinary  depreciation  in  property  should  be  repre- 
sented in  sufficient  reserves. 

The  false  record  that  probably  has  caused  most 
havoc  among  business  men  is  the  inflated  inventory. 
Every  dollar  of  inflation  in  an  inventory  is  that  much 
deception  as  to  profits.  The  inventory  may  contain  items 
not  really  in  stock,  or  may  be  priced  too  high,  or  may 
contain  old  and  worthless  stock  at  the  purchase  price, 
which  amounts  to  the  same  thing.  The  auditor  must 
ascertain,  if  possible,  what  the  goods  are  really  worth. 

The  ledger  may  show  intangible  assets,  which  are 
not  only  intangible,  but  do  not  exist.  Good-will  account 
is  sometimes  in  this  condition;  Patent-right  and  Copy- 
right accounts  often  are. 

The  liability  accounts  also  demand  inspection.     Are 


AUDITING  161 

all  accounts  payable  and  notes  payable  entered  at  their 
full  amount?  Have  notes  receivable,  when  discontinued, 
been  entered  as  contingent  liabilities?  Is  the  firm  liable 
on  accommodation  paper? 

Records  which  show  either  'an  inflation  in  assets 
or  a  false  diminution  in  liabilities,  require  adjustment. 

A  firm 's  books  may  show  a  condition  contrary  to. 
the  foregoing,  that  is,  assets  may  be  entered  too  low,  or 
liabilities  too  high,  resulting  in  a  showing  of  less  worth 
or  capital  than  the  business  really  posseses.  Such  a  con- 
dition, called  a  secret  reserve,  may  work  hardship  on 
the  shareholders  of  a  corporation,  who  may  be  entitled 
to  dividends  which  do  not  show  on  the  books,  or  who 
may  be  induced  to  sell  their  stock  while  believing  it  to 
be  worth  less  than  it  really  is. 

The  capital  stock  account  may  need  auditing.  There 
are  many  ways  in  which  this  account  may  be  misleading. 
It  would  be  difficult  to  estimate  the  number  of  corpora- 
tions thai  have  been  at  fault  in  issuing  shares  of  stock  to 
individuals  in  exchange  for  promissory  notes,  or  for  con- 
siderations other  than  cash,  the  value  of  which  is  less 
than  the  par  value  of  the  stock. 

The  cash  account  should  be  examined  for  uninten- 
tional regularities.  Is  the  balance  in  the  cash  book  all 
current  money  ?  A  cash  balance  running  into  four  figures 
has  been  known  to  represent  a  few  coins,  a  few  bills  and 
a  large  quantity  of  expense  tickets,  due  bills,  protested 
paper  and  other  items  carried  in  the  hope  of  a  future 
conversion  into  money. 

Is  the  bank  account  correct?  Tl.is  can  best  be  as- 
certained by  a  reconciliation  of  the  bank  statement  with 
the  depositor's  record  discussed  in  detail  in  Prin.  84  B. 

84  B.  Reconciliation  of  Bank  Statement.  A  bank 
usually  delivers  a  statement  of  the  checking  account  to 
the  depositor  on  the  first  of  the  month.  This  statement 
is  accompanied  with  the  depositor's  paid  and  cancelled 
checks,  which  should  agree  with  the  debits  in  the  state- 
ment. The  deposits,  as  credited  in  the  statement,  should 
agree  with  the  amounts  entered  in  the  depositor's  bank 


162  RULES 

book  or  his  cash  account.  The  difference  between  total 
deposits  and  total  checks,  as  appearing  on  the  statement, 
is  entered  by  the  bank  as  a  balance  due  the  depositor. 

If  the  balance  on  the  statement  agrees  with  the  bal- 
ance in  the  depositor's  books,  the  statement  is  assumed 
to  be  correct  without  further  attention,  except  that  the 
checks  should  be  compared  with  the  depositor's  entries 
in  order  to  make  sure  that  all  canceled  checks  have  been 
returned.  This  comparison  is  indicated  by  check-marks 
in  the  depositor's  cash  book. 

For  several  reasons,  the  bank  balance  does  not  often 
agree  with  the  depositor's  balance  on  a  given  day;  among 
these  reasons  are:  (1)  certain  checks  issued  by  the  de- 
positor may  be  in  transit;  (2)  deposits  charged  to  the 
bank  on  the  depositor's  books  at  the  end  of  the  month 
may  not  have  been  credited  by  the  bank  during  the 
month  covered  by  the  statement;  (3)  the  bank,  may  have 
made  charges  for  collections  or  other  items  which  have 
not  been  credited  in  the  depositor's  books;  (4)  the  bank 
may  have  credited  collections  made  for  the  depositor, 
which  the  latter  has  not  entered;  (5)  there  may  be  mis- 
takes in  the  bank's  statement  or  in  the  depositor's  books. 

To  reconcile,  make  additions  to  and  deductions  from 
the' balance  reported  in  the  bank's  statement,  as  follows: 

(1).  Compare  your  record  of  checks  issued  with  the 
charged  and  cancelled  checks  returned;  if  any  checks 
are  found  to  be  in  transit,  subtract  their  sum  from  the 
balance  shown  on  the  bank's  statement. 

(2).  Compare  your  record  of  deposits  with  the  de- 
posits entered  in  the  statement ;  if  any  deposits  are  mis- 
sing from  the  statement,  add  their  sum  to  the  bank's 
balance. 

(3).  Compare  the  bank's  statement  to  discover  any 
petty  charges  made  by  the  bank  that  have  not  been  re- 
ported, or  have  not  been  credited.  If  any  are  found,  add 
their  sum  to  the  bank's  balance.  Also  make  the  proper 
adjustment  entry  in  the  cash  book. 

(4).  Look  for  any  credit  given  in  the  bank's  state- 
ment for  collections  or  other  items  that  have  not  been 


AUDITING  163 

entered;  if  any  are  found,  subtract  their  sum  from  the 
bank's  balance  as  shown  on  the  statement.  Also  make 
the  adjustment  entry  in  the  cash  book. 

(5).  If  there  are  errors  either  in  the  bank's  state- 
ment or  in  your  books,  correct  the  one  that  is  wrong,  and 
report  to  the  bank,  if  the  banker's  account  is  in  error. 

Pin  to  the  bank  statement  the  sheet  on  which  the 
foregoing  computations  have  been  made,  in  order  to 
show  the  reconciliation  of  the  two  accounts,  and  file  them 
for  reference  when  the  next  following  statement  is  to  be 
reconciled. 

85.  .An  Audit  to  Show  Fraud  or  Its  Absence  in- 
volves tests  to  show  whether  or  not  defalcation,  embezzle- 
ment, or  misrepresentation  has  occurred.  These  may  take 
several  forms;  among  them,  are,  (1)  defalcation  of  cash 
or  other  agents  of  the  concern.  The  direct  question  to 
be  answered  is,  Has  there  been  misappropriation  of  cash 
ranted  financial  risks? 

85  B.  Such  an  audit  goes  into  the  matter  of  the 
discharge  of  trust  delegated  to  officers  and  employees, 
or  other  agents,  of  the  concern.  The  direct  question  to 
be  answered  is,  Has  there  been  misappropriation  of  cash 
or  property,  or  any  showing  made  in  the  books  that 
would  cause  either  investors  or  creditors  to  take  unwar- 
ranted financial  risks? 

"Where  deliberate  fraud  is  practiced,  the  conceal- 
ment may  be  more  or  less  ingenious,  depending  upon  the 
skill  of  the  offender;  yet  in  the  great  majority  of  cases 
when  a  fraudulent  entry  is  discovered,  that  entry  affords 
the  key  to  the  entire  defalcation,  for  embezzlers  rarely 
take  the  risk  of  confusing  themselves  by  the  use  of  a 
variety  of  methods. 

In  looking  for  fraud,  the  auditor  should  first  de- 
termine how  far  the  bookkeeping  system  in  use  affords 
a  check,  and  how  faithfully  this  check  has  been  carried 
out;  then  he  must  devise  and  put  into  execution  such 
further  tests  as  may  be  needed  to  reduce  the  matter  to 
a  reasonable  degree  of  certainty.  Among  these  tests  are 
the  following: 


164  RULES 

85  C.  Defalcation  of  Cash  or  Securities.  The  audi- 
tor's first  step  is  to  count  the  cash  actually  on  hand. 
This  means  to  make  list  of  the  money,  checks,  or  what- 
ever passes  as  cash,  whether  in  the  till  or  cash  drawer, 
or  in  the  safe  or  vault — all  cash,  and  the  bank  balance, 
if  this  is  included  in  the  cash  account.  This  should 
agree  with  the  cash  account  balance  taken  at  the  time 
the  cash  is  counted. 

Many  tricks  may  be  practiced  on  the  cash  drawer  by 
which  the  cashier  is  enabled  to  abstract  money  without 
.  making  any  permanent  record.  Such  practice  is  foolish 
as  well  as  dishonest,  but  both  foolish  and  dishonest  peo- 
ple continue  to  follow  the  steps  of  those  already  in  jail. 
Among  the  devices  of  the  tricky  cashier  are  the  follow- 
ing: 

(1).  The  cashier  may  simply  take  an  amount  out  of 
the  drawer,  and  leave  in  its  stead  a  cash  ticket  which  is 
counted  as  so  much  money.  This  looks  like  a  harmless 
practice  because  there  are  times  when  one  must  take 
cash  for  a  purchase  or  a  payment  of  some  amount  not 
yet  determined,  the  intention  being  to  return  the  unused 
cash,  make  a  charge  for  the  amount  spent,  and  destroy 
the  memorandum  ticket.  Such  tickets  should  be  ex- 
amined closely,  for  a  ticket  of  that  kind  should  not  be 
allowed  to  remain  day  after  day. 

(2).  A  cashier  may  take  a  perpetual  loan  out  of  the 
cash  drawer  in  this  wise :  A  customer  may  pay  an 
amount,  say  $100,  for  which  the  cashier  makes  a  credit 
ticket  dated  one  day  later.  He  makes  no  entry  of  the 
ticket  on  the  day  received,  but  "borrows"  the  cash  for 
his  own  use.  The  following  day  he  credits  the  ticket 
regularly,  except  one  day  late,  and  holds  out  another 
payment,  or  payments  totaling  the  $100,  which  is  held 
up  from  entry  until  the  next  day,  and  so  on, 
indefinitely.  As  the  larger  collections  are  usually  checks, 
the  dishonest  cashier  must  pay  into,  or  take  out  of,  the 
drawer  the  difference  between  the  original  $100,  and  the 
nearest  approach  he  can  make  to  the  required  amount, 
or   else   increase   or   diminish   his   "loan."     An   auditor 


AUDITING  165 

should  compare  the  dates  of  all  checks  and  drafts  in  the 
drawer  with  the  dates  of  entry  in  the  books,  and  the  date 
of  the  receipt  if  possible.  Where  remittances  are  re- 
ceived through  the  mail,  the  date  of  receipt,  even  to  the 
hour,  if  necessary,  should  be  stamped  on  the  letters. 

(3).  There  may  be  dummy  checks  in  the  drawer, 
that  is,  imitations  of  checks  left  there  to  be  counted  as 
cash. 

Having  satisfactorily  shown  that  the  cash  on  hand 
agrees  with  the  cash  balance,  the  next  step  is  to  follow 
the  receipts  and  payments  of  cash  during  the  audit 
period. 

(4).  A  cash  balance  may  have  been  forced,  that  is, 
a  smaller  amount  than  the  real  balance  may  have  been 
entered  in  the  books,  and  footings  made  to  balance,  when 
they  really  would  not  be  equal  if  properly  added.  Such 
a  forced  balance  necessitates  a  like  change  in  some 
amount  posted  to  the  ledger;  in  order  words,  an  amount 
from  the  cash  book  must  be  omitted  in  the  ledger,  or 
else  posted  at  a  wrong  amount  to  equalize  the  dis- 
crepancy in  cash.  Thus,  cash  might  be  forced,  $9.90  and 
an  item  of  $10  posted  as  10  cents  to  satisfy  the  trial 
balance. 

The  way  to  detect  a  forced  cash  book,  is  to  review 
the  footings.  Although  the  cash  book  may  have  been 
balanced  many  times-  during  the  audit  period,  the 
debits  and  credits  of-  the  entire  period  can  be  footed 
separately  on  two  lists.  Whatever  the  number  of  col- 
umns in  a  cash  book,  there  should  be  one  column  for  all 
net  cash  receipts,  and  one  for  all  net  cash  payments.  In 
some  cash  books,  this  may  not  be  the  case.  Then  the 
items  must  be  picked  out  of  various  columns. 

(5).  After  the  cash  book  is  found  to  be  mechan- 
ically correct,  the  cash  payments  demand  attention. 
Cash  may  have  been  taken  out  and  wrongfully 
charged  to  some  nominal  account.  The  accounts  of 
Expense,  Purchases  and  unclassified  losses  should  be 
examined  to  discover  unreasonable  or  unnatural 
charges.     Also,  the  vouchers  should  be  scrutinized,  and 


166  RULES 

all  paj'mente  should  be  reviewed  with  care.  Payments 
to  persons,  if  in  the  correct  amounts,  are  assumed  to  be 
correct,  otherwise  there  would  be  complaint  from  the 
persons  paid. 

(6).  The  cash  receipts  demand  attention.  Were 
the  amounts  entered  on  the  debit  or  receiving  side  of  the 
cash  book  the  amounts  actually  received?  Were  the  dis- 
counts deducted  from  customers '  invoices  actually  al- 
lowed? Allowances  may  be  recorded  as  deducted  from 
bills,  although  neither  valid  nor  allowed.  For  example, 
a  remittance  of  $100  on  account  might  be  entered  as  only 
$80,  and  an  entry  made  crediting  the  customer  for  $20 
allowed  for  damaged  goods  or  other  causes.  For  this  and 
similar  reasons,  rebates  and  allowances  need  attention. 

If  in  doubt  as  to  the  correctness  of  the  entries  of 
checks  and  drafts  received,  secure  the  deposit  tickets 
for  the  period,  from  the  bank,  and  compare  the  items 
thereon  with  the  entries  in  the  cash  book.  The  bank 
balance  itself  may  be  carried  on  the  books  at  a  greater 
amount  than  the  real  balance.  Reconcile  the  bank  state- 
ment.    (Prin.  84  B.) 

(7).  Securities  (stocks,  bonds  and  notes)  must  be 
checked  to  see  that  they  are  held  by  the  concern,  are 
genuine,  and  that  they  agreed  with  the  records.  The 
matter  of  dates  and  signatures  of  notes  is  important.  A 
spurious  note  might  represent  the  loss  of  a  great  deal  of 
money.  / 

The  foregoing  suggestions  afford  a  beginning  from 
which  the  auditor  may  extend  research  as  occasion 
demands. 

85  D.  An  Audit  to  Show  Misappropriation  of  Prop- 
erty refers  to  the  kind  of  property,  how  it  is  held,  and 
the  system  of  records  already  pertaining  to  it. 

Commodities  in  store  room,  warehouse  or  with  agents, 
or  wherever  kept,  are  easily  abstracted  unless  properly 
guarded. 

If  charges  are  made  for  purchases  when  it  is 
suspected  that  the  goods  were  not  received,  an 
auditor  should  first  eliminate  the  invoices  from  reputable 


AUDITING  167 

houses  whose  statements  show  agreeing  entries.  Having 
found  such  to  be  correct,  there  may  remain  miscellaneous 
purchases  of  a  more  or  less  irregular  nature.  These  may 
be  traced  in  various  ways.  If  there  is  no  invoice  from 
the  seller,  there  is  likely  to  be  at  least  a  memorandum  of 
what  was  bought.  Anything  bought  would  ordinarily 
be  either  sold,  used,  destroyed  or  still  in  stock.  If  none 
of  the  last  three  dispositions  can  be  shown  to  account 
for  purchased  goods,  a  record  of  sale  should  exist.  Cer- 
tain items  that  seem  to  require  especial  attention  may  be 
checked  through  the  sales  records  to  show  disposition.  A 
sufficient  number  of  such  items,  thus  verified,  should  es- 
tablish a  fair  presumption  that  all  are  correct. 

Managers  of  branch  stores  and  other  agents  having 
goods  in  stock  belonging  to  the  principal,  should  render 
periodic  inventories  of  stock  on  hand.  The  correctness 
of  the  inventories  must  be  verified  by  checking  the  in- 
ventory with  the  goods. 

A  rough  way  of  determining  whether  there  is  any 
great  loss  in  stock,  is  to  compare,  from  previous  periods, 
the  average  per  cent  profit  on  sales.  By  deduct- 
ing this  percentage  from  the  total  sales  of  an 
audit  period,  a  remainder  would  be  left  which  should 
approximate  the  cost  of  the  merchandise  sold  for  the 
period.  The  auditor  must  use  his  judgment  as  to  apply- 
ing this  plan,  as  conditions  differ. 

Goods  may  be  removed  from  stock  and  charged 
to  fictitious  persons.  An  examination  of  the  accounts 
receivable  would  probably  disclose  any  such.  This  ex- 
amination should  extend  especially  to  overdue  accounts, 
or  accounts  containing  irregular  entries. 

A  shortage  in  the  inventory  may  be  fraudulently 
covered  by  raising  the  prices  in  a  subsequent  inventory 
over  what  they  were  in  a  previous  inventory.  A  compari- 
son of  prices  should  be  made. 

85  E.  A  Misrepresentation  of  the  Business  may  be 
made  to  accomplish  fraud  upon  investors  or  creditors. 
An  insolvent  bank  may  be  represented  as  solvent,  in 
order  to  attract  deposits  that  it  will  be  unable  to  repay. 


16S  RULES 

A  merchant  may  represent  himself  as  being  worth  more 
than  he  is,  in  order  to  secure  larger  credit  in  goods  or 
money  than  he  is  entitled  to.  A  business  manag'er  may 
overtstate  the  profits  of  a  given  period,  in  order  to  secure 
the  approval  of  stockholders  and  a  continuance  of  man- 
agement. Directors  of  a  company  may  declare  and  pay 
dividends  on  stock,  by  borrowing  money  for  this  pur- 
pose, or  by  taking  the  so-called  dividends  out  of  the  capi- 
tal, thus  making  the  stock  appear  more  valuable  than  it 
is  and  thereby  attracting  other  investors.  On  the  other 
hand,  the  profits  of  a  business  may  be  concealed,  although 
great  enough  to  entitle  stockholders  to  dividends  which 
are  not  declared.  Under  such  impressions,  dissatisfied 
stockholders  might  be  induced  to  sell  their  stock  for  less 
than  it  is  worth. 

Many  kinds  of  misrepresentation  have  been  used  to 
make  the  business  appear  either  better  or  worse  than  it 
really  is.  The  auditor  should  proceed  under  such  con- 
ditions as  outlined  in  Prin.  84. 

86.  An  Audit  to  Show  Suitable  Books  requires  a 
knowledge  of  the  business  under  consideration,  so  far  as 
its  needs  of  record  are  concerned,  and  a  knowledge  of  the 
most  suitable  books  and  records  for  the  transactions  and 
operations.  The  auditor  should  begin  with  an  outline  of 
books,  rulings,  records,  etc.,  theoretically  suited  to  the 
conditions. 

"When  revising  an  old  system,  he  should  compare  the 
books  under  examination,  step  by  step,  with  the  system 
he  has  in  mind,  and  should  look  for,  and  note,  the  specific 
deficiencies  of  the  former,  and  make  a  note  of  the  econ- 
omies or  advantages  possible. 

Recommended  changes  should  be  definite,  and  should 
compute  time  saved  by  the  proposed  method,  on  the  basis 
of  a  year ;  the  specific  economies  to.  be  effected  should  be 
reduced  to  dollars  and  cents.  Safeguards  suggested 
should  be  suited  to  the  conditions  under  which  the  em- 
ployees are  working. 

Proposed  changes  should  be  with  a  view  to  retaining 
all  of  the  old  features  that  can  be  made  to  work  in  with 


AUDITING  169 

the  new  plan.  To  change  a  bookkeeper's  long  established 
habits,  is  to  take  away  from  him  facility  of  action  which 
it  has  taken  time  to  acquire.  For  example,  a  bookkeeper 
who  has  posted  from  right  to  left  for  many  years,  would 
probably  make  many  mistakes  and  go  through  much 
hardship  before  learning  to  post  from  left  to  right  with 
anything  like  equal  ease.  To  change  even  the  position  of 
a  light  might  disturb  a  habit,  and  give  rise  to  numerous 
errors.  The  auditor  must  consider  the  working  force  as 
well  as  the  system. 

Again,  it  is  practically  useless  to  recommend  a  sys- 
tem, that  will  show  results  so  finely  analyzed  that  the 
manager  himself  cannot  understand  it,  or  will  not  use  it. 
This  great  mistake  has  been  made  by  many  well-inten- 
tioned systematizers,  who  gauged  the  manager's  power 
to  grasp  and  utilize  information  derived  from  books,  by 
their  own  facility  in  this  direction.  The  constructive 
auditor  should  recommend  office  changes  with  a  careful 
regard  to  the  ability  of  those  who  are  to  utilize  the  sys- 
tem, as  well  as  to  the  ideal  advantages  of  the  system 
itself.  He  should  not  feel  that  his  labor  is  wasted  merely 
because  he  cannot  secure  the  installment  of  as  fine  a 
bookkeeping  system  as  he  would  like.  He  has  done  his 
part  when  he  has  provided  the  best  that  his  employer 
can  use. 

87.  An  Audit  to  Show  Worth  and  Earning  Power 
involves  the  verification  of  existing  records,  and  the 
preparation  of  such  additional  data  as  is  needed  to 
answer  the  questions:  What  is  the  physical  worth  of 
the  property?     What  does  it  earn  per  year? 

The  exhibit  from  the  books  may  be  complete,  correct, 
and  satisfactory,  or  it  may  be  only  partial,  but  good  so 
far  as  it  goes.  Where  the  system  falls  short,  constructive 
auditing  begins. 

87  B.  .The  worth  of  the  business  is  exhibited  in  the 
real  accounts.  These  consist  of,  (1)  cash  and  cash  collect- 
ible; (2)  floating  property ;  (3)  fixed  property ;  (4)  specu- 
lative property;  (5)  intangible  property;  (6)  liability  to 
creditors. 


170  RULES 

Cash,  accounts,  notes,  and  other  claims,  should  be 
verified  as  to  amounts  and  collectibility;  floating  prop- 
erty should  be  verified  from  inventories,  as  should  also 
unrecorded  amounts  of  money  due  (for  example,  ac- 
crued interest,  rent  or  insurance  prepaid).  Fixed  prop- 
erty should  appear  itemized  in  the  ledger  at  cost ;  and  de- 
preciation should  be  represented  in  reserve  accounts. 
Speculative  property  should  be  viewed  particularly  as  to 
its  present  worth,  and  a  sufficient  amount  should  be  writ- 
ten off  to  make  good  any  fall  in  value.  Intangible  prop- 
erty should  be  examined  with  a  view  to  the  expiration 
of  its  value,  and  the  required  amount  to  be  written  off. 

The  liabilities  should  be  carefully  gone  over  to  see 
that  all  are  included.  Often  a  search  for  contingent 
liabilities  will  disclose  matters  that  should  be  recorded. 
The  owners'  credits  consist  of  reserves,  surplus,  undi- 
vided profits,  and  capital.  The  reserves  must  be  looked 
into  to  see  what  portion,  if  any,  should  be  allotted  to 
depreciation,  bad  debts  or  other  shrinkage  in  assets. 

Having  reduced  all  of  the  above  to  their  correct 
value  as  assets  and  liabilities,  the  net  worth  of  the  busi- 
ness may  be  found  from  their  assemblage  in  a  statement. 

87  C.  Having  determined  the  net  worth  of  the  busi- 
ness, the  profits  for  the  year  are  found  by  comparison  of 
the  present  net  worth  with  the  net  worth  at  the  begin- 
ning of  the  year.  The  profits  may  be  found  analyzed 
in  more  or  less  detail  in  the  nominal  accounts,  if  such 
have  been  kept. 

The  net  profit  of  the  current  year  should  undergo 
comparison  with  the  net  profits  of  preceding  years,  to 
determine,  (1)  the  average  profit,  year  after  year;  (2) 
whether  the  annual  profits  have  been  variable,  some 
years  much  more  than  others,  and  the  reasons  for  any 
such  variations  should  be  clearly  established. 

Furthermore,  it  is  essential  that  an  apparent  net 
profit  be  analyzed,  to  see  whether  it  is  profit  resulting 
from  the  incomes,  or  from  capital  and  fluctuation. 
Thus,  the  fortunate  sale  of  real  estate  owned  by  a  fac- 
tory, might  swell  the  gains  of  a  certain  year  to  double 


AUDITING  171 

their  ordinary  amount,  while  the  business  profits  might 
be  the  same  as  before.  A  stock  of  goods  purchased 
before  a  war  or  other  great  disturber  of  values,  might 
be  sold  for  double  or  treble  its  former  value.  Profits 
under  such  circumstances  as  these,  are  not  a  criterion 
as  to  the  earning  power  of  the  business. 

88.    Legal  Aspects: 

The  exchanges  between  persons  as  recorded  in  book- 
keeping, are  assumed  to  be  in  accordance  with  contracts, 
but,  in  ordinary  selling,  the  details  of  these  contracts 
are  not  often  referred  to,  it  being  understood  that 
they  are  determined  by  custom.  This  may  sometimes 
give  rise  to  misapprehensions  that  have  a  decided  bear- 
ing on  the  condition  of  the  business,  or  of  the  individual 
investors,  and  an  auditor  should  not  overlook  them. 
Persons  frequently  enter  into  business  relations  without 
clearly  understanding  the  risks  involved,  and  may  not 
properly  safeguard  their  own  interests.  Also,  they  may 
have  overlooked  rights  which  would  materially  advance 
their  interests  if  enforced.  A  number  of  matters  relating 
to  the  legal  aspects  of  business  are  referred  to  under  this 
number. 

88  B.  Sale  of  Goods.  To  sell,  is  to  transfer  owner- 
ship in  the  thing  sold  for  a  money  consideration.  The 
seller  of  commodities  is  chiefly  interested  in  knowing 
whether  a  supposed  sale  of  merchandise  is  really  a  sale 
when  the  transfer  takes  place,  and  who  is  to.  bear  the 
legal  risks  of  losses  in  connection  with  the  sale. 

A  sale  is  the  execution  of  a  contract.  This  consists 
of  an  offer  on  the  part  of  the  seller  and  its  acceptance 
on  the  part  of  the  buyer,  or  the  reverse,  which  is  suffi- 
ciently definite  to  be  enforced  by  legal  action. 

Having  transferred  goods,  the  important  question 
arises  as  to  whether  a  sale  has  been  so  made  that  the 
buyer  cannot  legally  avoid  payment. 

Sales  of  goods  on  credit  are  made  either  on  a  verbal 
or  a  written  order,  which  is  delivered  to  the  seller  or  to 
his  authorized  agent. 


172  RULES 

(1).  If  on  verbal  order  without  restrictions,  the 
acceptance  of  the  commodity  by  the  buyer  is  evidence 
of  his  agreement  to  pay  for  it.  If  no  price  is  specified, 
the  regular  published  price,  or  the  regular  market  price 
of  the  goods  on  the  day  named  is  collectible.  To  avoid 
paying  for  goods,  the  buyer  must  refuse  to  accept  them 
when  they  are  offered,  or  must  show  that  they  were  not 
as  represented. 

(2).  When  goods  are  sold  on  unqualified  written 
order  by  mail,  wire,  or  messenger,  the  transfer  of  tho 
property  from  the  seller  to  buyer  ordinarily  takes  placo 
when  the  seller  delivers  the  goods  to  the  railroad  or 
other  carrier  designated  or  implied  in  the  order.  In 
this  case  any  loss  or  injury  to  the  property  while  in 
transit,  or  any  risk  incurred  in  connection  with  it  is 
borne  by  the  buyer,  who  looks  to  the  carrier  for  damages. 

(3).  Either  the  offer  to  sell  or  the  order  for  the 
goods  may  specify  certain  conditions  of  time  or  place 
that  would  place  the  risk  upon  the  seller.  Thus  when 
sale  is  made  "on  approval, "  the  goods  may  be  received 
by  the  buyer,  examined  and  refused.  In  that  case  the 
seller  is  under  obligation  to  see  to  their  return.  But  if 
the  buyer  holds  the  goods  without  refusal,  beyond  the 
time  set,  or  beyond  a  reasonable  time  if  no  time  is  set, 
his  acceptance  is  implied,  and  the  account  would  prob- 
ably be  collectible. 

(4).  Manufacturers  and  others  desiring  to  promote 
the  sale  of  goods,  sometimes  ship  them  out  "on  sale," 
that  is,  to  be  paid  for  when  the  buyer  sells  them.  In 
such  case,  the  buyer  is  accountable  in  cash  for  the  part 
that  he  has  sold.  When  goods  are  regularly  kept  on 
sale,  it  is  customary  for  the  selling  agent  to  render 
statements  and  remit  proceeds  of  sales  monthly,  quar- 
terly, or  annually.  The  conditions  should  be  specified  in 
a  written  contract. 

(5).  The  sale  of  goods  C.  0.  D.,  gives  rise  to  a 
variety  of  legal  opinions  as  to  whether  the  title  to  the 
goods  passes  at  the  time  of  sending  the  goods  out  of  the 
sales   room,   or   at   the   time   they   are   received   by   the 


AUDITING  173 

buyer.  Since  the  terms  signify  that  the  buyer  is  not 
entitled  to  possession  until  he  pays  for  them,  the  practi- 
cal result  is  that  regardless  of  any  legal  rights,  the 
seller  generally  pays  the  expense  of  their  transportation 
both  out  and  in,  if  they  are  refused. 

(6).  In  some  instances,  the  title  passes  without  the 
property  being  handled  at  all,  as  when  grain  is  trans- 
ferred by  the  delivery  of  warehouse  receipts,  or  where 
title  to  property  is  transferred  by  delivery  of  a  bill  of 
sale. 

88  C.  Collection  of  Accounts  and  Notes.  After  a 
sale  on  account  is  made,  provision  must  be  made  for  col- 
lection. Usually,  the  first  step  is  to  send  the  customer  a 
statement  of  the  amount  owed  on  the  first  of  the  month 
following  the  sale.  This  statement  is  not  a  reminder 
to  pay,  if  the  account  is  not  due;  it  merely  affords  the 
customer  an  opportunity  to  compare  accounts  and  note 
discrepancies.  Where  the  account  is  due,  the  statement 
is  regarded  as  a  notice  that  payment  is  expected. 

(1).  Wholesalers  usually  allow  customers  a  certain 
term  of  credit,  but  offer  a  discount  from  the  bill  for 
immediate  or  early  cash  payment.  As  a  cash  discount  is 
usually  considerably  more  than  the  current  rate  of  in- 
terest on  the  amount  for  the  given  time,  the  seller  has  a 
right  to  assume  that  a  customer  who  will  not  take  a 
cash  discount  is  either  unable  to  borrow  money  of  his 
banker  to  meet  bills,  or  is  negligent  of  the  profit  he  could 
make  by  discounting.  In  either  case,  the  customer's 
credit  is  affected  and  his  account  is  to  be  more  closely 
watched. 

(2).  When  the  unpaid  account  becomes  due,  a 
letter  of  reminder  is  usually  sent.  This  bringing  no  re- 
sponse, a  notice  of  sight  draft  may  follow,  and  a  sight 
draft  on  the  customer  for  the  amount  may  be  sent  to  a 
bank  for  collection.  If  still  unpaid,  correspondence 
should  disclose  the  reason  for  non-payment.  It  may 
be  that  more  time  is  desired.  This  is  frequently  granted 
by  taking  the  customer's  note  to  settle  the  account. 
This  resolves  the  debt  into  a  form  more  easily  handled, 


174  RULES 

besides  making  it  draw  a  specified  rate  of  interest,  and 
extending  the  period  beyond  which  it  would  be  outlawed. 

Doubt  as  to  the  customer's  ultimate  ability  to  pay 
might  justify  the  taking  of  a  mortgage  on  his  real  or 
personal  property  to  secure  the  debt. 

In  extreme  cases,  a  mortgage  received  would  be  fol- 
lowed by  foreclosure  and  the  sale  of  the  mortgaged  prop- 
erty with  a  view  to  applying  the  proceeds  on  the  debt. 

(3).  If  other  means  fail,  the  debtor  may  be  sued 
for  the  account  or  note,  and  if  the  claim  be  proved  cor- 
rect, a  judgment  will  be  entered  against  the  debtor. 
This  would  be  followed  by  a  forced  sale  through 'a  court 
officer  of  any  of  the  debtor's  property  which  is  not  ex- 
empt from  execution.  The  legal  expenses  of  securing 
judgment  are  paid  by  the  creditor,  and,  with  the  excep- 
tion of  lawyers'  fees,  are  added  to  the  claim  against  the 
debtor. 

(4).  An  account,  note,  or  judgment  may  remain 
unpaid  for  so  long  a  time  that  the  debtor  can  refuse 
payment  under  the  statute  of  limitations.  There  is  much 
variation  in  the  different  states  as  to  the  time  when  this 
statute  applies.  It  may  be  from  two  to  eight  years,  on 
accounts;  from  three  to  fifteen  years  on  notes;  and  from 
five  to  twenty  years  on  judgments.  (See  Index  Com- 
mentary.) When  this  time  has  expired,  the  debtor  may 
plead  the  statute  of  limitations  and  thus  avoid  payment. 

88  D.  The  Purchase  of  Land  is  a  more  formal  mat- 
ter than  the  purchase  of  goods,  and  must  be  evidenced 
by  a  written  contract,  called  a  deed,  which  is  given  by 
the  seller  to  the  buyer.  Land  is  perpetual,  and  title  to  it 
is  a  matter  that,  in  the  course  of  time,  by  passing  through 
many  hands,  would  be  hopelessly  confused  if  a  public 
record  of  all  transfers,  liens,  or  encumbrances  were  not 
required.  An  officer  variously  called  a  county  recorder, 
recorder  of  deeds,  register  of  deeds,  or  recording  clerk, 
whose  duty  it  is  to  make  permanent  public  record  of  the 
documents  affecting  the  title  of  land,  is  regularly  elected 
or  appointed  in   each  county.     It  is   assumed  that   any 


AUDITING  175 

prospective  purchaser  of  land  will  satisfy  himself  as  to 
the  title  of  the  land,  by  referring  to  the  public  records, 
where  conflicting  claims  upon  the  property,  if  there  are 
any  such,  should  be  recorded.  Purchasers  of  land  do 
not  often  examine  the  records  personally,  but  secure  an 
abstract  of  title,  which  is  a  carefully  prepared  explana- 
tion or  digest  of  all  documents  that  affect  the  title  of  the 
given  property.  This  abstract  is  based  on  the  county  rec- 
ords. Any  doubtful  question  about  title  to  property 
should  be  submitted  to  a  real  estate  lawyer. 

The  purchaser,  on  receiving  a  deed  to  the  property, 
should  send  the  deed  to  the  county  recording  office  for 
record  at  once.  To  do  so,  is  highly  important  »  since 
this  record  alone  conveys  notice  to  the  public  of  the 
pui chaser's  title.  He  will  thus  have  priority  of  record 
as  protection  against  other  claimants  who  might,  through 
errors  or  double  dealing  on  the  part  of  the  vendor, 
have  mortgages,  or  other  liens  of  which  the  purchaser 
had  no  notice,  and  which  might  be  recorded  by  these 
claimants. 

Some  of  the  liens  which  should  be  looked  f6r  are  the 
following:  mortgages;  rights  of  heirs  of  a  deceased  for- 
mer owner;  rights  of  spouse  or  others  through  imper- 
fect previous  conveyance  or  disability  of  the  conveyor; 
unpaid  taxes;  mechanics '  liens  for  unpaid  labor  or  ma- 
terial in  the  property;  judgments  against  a  former 
owner ;  a  lease  of  the  property  to  a  tenant. 

On  the  other  hand,  persons  interested  in  any  of  the 
above  mentioned  or  other  liens  against  property,  should 
have  the  same  recorded,  in  accordance  with  the  state  laws, 
in  order  to  secure  their  priority  of  record,  which  is  a 
notice  to  subsequent  parties  of  their  interest  in  the 
property. 

After  being  recorded,  the  deed  should  be  preserved 
by  the  owner  of  the  land. 

88  E.  Commercial  Papers  consist  of  drafts  and 
checks,  acceptances,  promissory  notes,  and  bonds.  They 
are  demands  upon  a  person   (the  drawee)    or  promises 


176  RULES 

made  by  a  person  (the.  maker)  to  pay  to  the  order  of 
another  person,  a  sum  of  money  at  a  given  time. 

(1).  Negotiability  is  the  distinguishing  mark  of 
commercial  paper.  By  this  is  meant  that  the  given  paper 
can  be  passed  in  the  course  of  business  from  one  holder 
to  another,  and  that  any  bona  fide  holder  or  authorized 
payee,  has  the  legal  right  to  collect  the  paper  in  his  own 
name,  regardless  of  equities  existing  between  the  original 
parties  to  the  instrument.  Negotiable  paper  passes  cur- 
rent as  money  in  the  great  majority  of  business  settle- 
ments. 

(2).  The  draft  is  a  written  form,  used  by  a  first  per- 
son (the  drawer),  in  directing  a  second  person  (the 
drawee),  to  pay  a  given  sum  of  money  to  a  third  person 
(the  payee),  or  to  some  one  (the  endorsee),  whom  the 
payee*  designates.  Foreign  drafts  are  called  bills  of 
exchange. 

Suppose  that  two  men  named,  respectively,  Mr.  Give 
and  Mr.  Take,  live  in  your  home  city ;  and  that  Mr.  Owe, 
who  is  indebted  to  Mr.  Give,  lives  in  New  York  City. 
Also,  Mr.  Give  owes  Mr.  Take,  and  the  latter,  who  is 
about  to  go  to  New  York  City,  accepts  from  Mr.  Give  a 
letter  directing  Mr.  Owe  to  pay  Mr.  Take  a  sum  of 
money.  On  arrival,  Mr.  Take  hands  the  letter  to  Mr.  Owe 
and  receives  the  money.  Such  a  letter  would  be  called  an 
order.  But  if  the  letter  were  changed  so  as  uncondition- 
ally to  direct  Mr.  Owe  to  pay  the  money  ""to  the  order  of" 
Mr.  Take,  then  Mr.  Take  would  not  need  to  present  it 
personally  to  Mr.  Owe,  but,  by  endorsement,  could  pass 
the  paper  to  any  other  person,  whom  we  call  Mr.  Collect. 
Mr.  Collect  could  take  the  paper  to  Mr.  Owe  and  secure 
the  money  as  well  as  Mr.  Take  could.  Mr.  Collect,  if  he 
chose,  could  endorse  the  paper  to  another  person,  and  this 
person  to  still  another,  until  finally  the  last  endorsee 
could  present  it  to  Mr.  Owe  for  payment.  Papers  in 
form  to  be  handled  in  this  way  are  called  drafts. 

(3)  All  banks  have  money  on  deposit  in  other 
banks,  located  at  a  distance  in  trade  centers,  upon  whom 
they  draw  bank  drafts  for  sale  to  customers  who  wish  to 


AUDITING  177 

transmit  money  safely  through  the  mail.  A  properly  en- 
dorsed draft  is  collectible  by  only  one  person,  the  payee, 
or  by  an  endorsee.  A  lost  or  stolen  bank  draft  is  worth- 
less to  the  finder  or  thief,  unless  he  successfully  forges  the 
payee's  endorsement. 

(4)  Merchants  draw  drafts,  which  they  call  bills  of 
exchange,  on  distant  merchants  in  settlement  of  the  bal- 
ances due  between  them.  Such  drafts  when  payable  a 
certain  time  after  presentation,  are  called  time  paper. 

.  The  drawee  of  a  time  bill  of  exchange,  by  his  ac- 
ceptance promises  to  pay  it  at  the  expiration  of  the 
specified  time.  An  acceptance  usually  consists  in  the 
drawee's  writing  across  the  face  the  word  "Accepted," 
"0.  K.,"  or  some  similar  form  of  assent,  followed  by  his 
signature.  An  accepted  bill  of  exchange,  or  draft  pay- 
able, is  equivalent  to  a  note  payable,  and  is  entered,  in  the 
books,  in  the  account  of  Notes  Payable. 

(5)  Slow  customers  are  reminded  of  their  indebted- 
ness by  collection  drafts  sent  through  banks  for  presenta- 
tion to  the  drawees.  Collection  drafts  are  little  more 
than  duns,  and  are  of  no  value  until  paid. 

(6)  A  bank  check  is  essentially  a  draft  drawn  by  a 
depositor  on  the  bank  that  holds  his  deposit.  Checks  as 
ordinarily  made  are  negotiable.  Payment  by  check  is  the 
safest  way  to  disburse  money,  as  the  payer  thus  has  a  rec- 
ord of  each  payment  on  his  check  stub.  Also,  the  en- 
dorsement on  the  back  of  the  check  operates  as  a  receipt 
from  the  payee.  Banks  discourage  the  circulation  of 
checks  beyond  the  locality  where  issued. 

Checks  may  be  presented  to  the  drawee  bank  for 
certification,  which  is  a  writing  across  the  face  obligat- 
ing the  bank  to  pay  the  check  when  presented.  The 
word  ' '  certified, ' '  with  the  signature  of  a  bank  officer 
is  sufficient.  A  certified  check  is  an  obligation  of  the 
bank  in  all  legal  essentials  like  an  accepted  bill  of  ex- 
change. 

(7).  Bonds  issued  by  corporations,  municipalities, 
and  individuals,  are  usually  drawn  in  negotiable  form, 
like  notes,  and  can  be  transferred  by  endorsement. 


178  RULES 

All  commercial  paper  received  as  cash,  should  be 
collected  or  deposited,  within  a  day  after  receipt,  as  there 
are  contingencies  that  might  stop  payment. 

88  F.  Agents  are  persons  authorized  to  act  and  who 
do  act  for  others.  General  agents  represent  the  princi- 
pals in  all  business  actions  of  the  agency;  special  agents 
have  authority  extending  to  special  acts  only.  An  agent 
may  receive  "power  of  attorney"  from  his  principal, 
thus  authorizing  him  to  attach  his  principal's  name  and 
seal  to  contracts.  Agents  intrusted  by  a  principal  with 
merchandise,  ordinarily  have  a  lien  against  the  goods  in 
their  hands,  to  secure  payment  for  services. 

Salesmen,  collectors,  commission  merchants,  auc- 
tioneers, attorneys-at-law,  officers  of  corporations,  mem: 
bers  of  firms,  and  many  other  agents,  have  their  duties 
and  obligations  pretty  clearly  defined  by  law  and  custom. 
However,  it  is  possible  for  almost  any  agent  to  exceed 
his  authority,  and  to  involve  his  principal  in  obligations 
not  intended  by  either  of  them.  In  such  cases  the  prin- 
cipal might,  to  his  damage,  be  bound  to  third  parties  and 
possibly  be  unable  to  recover  from  the  agent  who  had  ex- 
ceeded his  authority. 

"When  an  agent  is  appointed  for  a  special  purpose, 
the  contract  should  be  in  writing,  and  should  clearly  ex- 
plain the  agent's  duties. 

88  G.  Partnership  is  a  relation  between  two  or  more 
persons  who  unite  capital,  labor  and  management  for 
joint  profit. 

The  relations  of  the  partners  should  be  written  in 
an  agreement,  clearly  stating,  (1)  the  names  of  the  part- 
ners and  of  the  firm;  (2)  the  nature  of  the  business;  (3) 
the  period  of  the  partnership ;  (4)  the  investments  of  the 
partners;    (5)   the  salary  allowed  partners  for  services; 

(6)  the  interest  allowed  partners  for  capital  invested; 

(7)  the  proportion  of  net  profit  or  loss  assigned  to  each 
partner;  (8)  a  limitation  preventing  any  partner  from 
involving  the  firm  in  unnecessary  obligations;  (9)  a  pro- 
vision for  the  continuation  or  the  dissolution  of  the 
partnership. 


AUDITING  179 

Ordinarily  each  partner,  as  agent  of  the  firm,  has 
power  to  bind  the  others  by  the  firm  contracts.  Each  is 
personally  liable  for  the  entire  indebtedness.  A  close 
relation  of  trust  exists  between  partners,  so  that  it 
is  unwise  for  anyone  to  join  business  interests  with  per- 
sons in  whom  he  has  not  entire  confidence,  or  who  are 
not  financially  responsible.  Every  partnership  should 
be  qualified  in  a  definite  written  agreement. 

A  partnership  may  be  dissolved  at  any  time  by  con- 
sent of  the  partners,  or  by  expiration  of  the  time  named 
in  the  agreement.  One  partner  may  withdraw  without 
consent  of  others,  before  the  time  set  in  the  contract, 
and  this  will  effect  a  dissolution  of  the  partnership;  but 
the  partner  who  does  this,  becomes  liable  for  damage  to 
the  other  partners  for  doing  so.  The  death  or  bank- 
ruptcy of  a  partner  dissolves  the  firm.  A  partner  cannot, 
by  withdrawal,  escape  liability  for  existing  debts  of  the 
firm  to  third  parties,  even  though  these  may  be  assumed 
by  the  remaining  members  of  the  firm.  The  estate  of  a 
deceased  partner  is  also  liable  for  the  firm  debts  at  the 
time  of  his  death. 

Owing  to  laxity  in  account  keeping,  one  partner  fre- 
quently has  unfair  advantages  over  another  which  are  dif- 
ficult to  adjust.  In  a  retail  store,  it  not  infrequently  occurs 
that  one  partner  takes  out  for  his  own  use,  goods  greatly 
in  excess  of  the  other's  drawings.  He  may  also  un- 
wisely create  debts  which  the  firm  must  pay,  and,  in 
other  improper  ways,  involve  his  partner's  capital.  An 
honest,  capable  person  is  frequently  at  the  mercy  of  a 
dishonest  partner,  and  cannot  escape  loss  so  long  as  the 
partnership  continues.  Some  of  the  heaviest  business 
losses  are  traceable  to  an  unwise  choice  of  partners. 

88  H.  A  Corporation  enables  several  persons  to  com- 
bine their  capital  and  services  under  one  management, 
while  avoiding  some  of  the  disadvantages  of  the  partner- 
ship relation. 

The  ordinary  private  corporation  is  formed  by  virtue 
of  general  acts  of  legislation,  which  specify  the  steps  to 
be  taken  by  persons  intending  to  incorporate,  and  which 
authorize  the  issuance,  to  the  incorporators,  of  a  certifi- 


180  RULES 

cate,  or  license,  which  evidences  their  compliance  with 
the  law.  Their  compliance  with  the  legal  provisions  en- 
ables the  incorporators  to  act  through  the  corporation  in 
the  following  ways:  (1)  the  capital  stock  (divided  into 
shares)  may  be  owned  by  stockholders,  who  can  dispose 
of  their  interests  in  the  company  to  other  persons,  and 
withdraw  entirely  from  it,  without  affecting  the  contin- 
uance of  the  corporate  organization;  (2)  the  corporation 
may  appoint,  or  remove  officers  or  agents  who  conduct  its 
business  and  make  contracts;  (3)  the  corporation  may 
use  a  corporate  seal  and  may  acquire  and  dispose  of  real 
property  in  its  own  name ;  (4)  the  corporation  may  incur 
debts  for  which  the  stockholders  are  not  individually 
liable  beyond  the  amount  of  their  stock  in  the  company, 
or  such  additional  amounts  as  may  be  specified  by  the 
laws  relating  to  specified  kinds  of  corporations;  (5)  a 
corporation  may  perform  all  the  ordinary  business  trans- 
actions that  an  individual  can,  provided  they  are  within 
the  purposes  for  which  the  corporation  was  formed. 

Specific  information  about  the  powers,  rights,  and 
obligations,  must  be  loured  for  in  the  laws  of  the  state 
where  incorporated. 

When  the  authorized  number  of  persons  desire  to 
incorporate,  they  draw  up  articles  of  incorporation  or  a 
certificate  of  incorporation.  A  blank  incorporation  form, 
to  be  filled  out  by  the  incorporators,  can  usually  be 
secured  from  the  Secretary  of  State  in  the  state  in  which 
the  corporation  is  formed.  These  articles  give  the 
name  of  the  corporation,  purposes,  amount  of  capital 
stock,  number  of  shares,  principal  place  of  business,  dura- 
tion of  corporation,  number,  names  and  addresses  of  the 
incorporating  stockholders,  the  number  of  shares  held  by 
each,  and  other  provisions. 

A  subscription  list  is  signed  by  persons  who  organize 
the  corporation,  each  agreeing  to  take  the  number  of 
shares  specified.  This  list  is  a  contract  upon  which  pay: 
ment  may  be  legally  enforced,  should  any  subscriber 
refuse  to  pay  his  pro  rata.  The  payments  made  by  the 
subscribers  constitute  the  capital  of  the  corporation. 

"When  the  stock  is  paid  for,  the  officers  issue  stock 


AUDITING  181 

certificates  to  the  subscribers,  who  then  become  stock- 
holders. 

The  incorporating  stockholders  elect  from  their  num- 
ber certain  members  to  be  directors.  The  directors  in 
turn  elect  the  officers.  The  officers  usually  include  presi- 
dent, vice-president,  secretary  and  treasurer.  The 
treasurer  usually  has  in  charge  the  bookkeeping  records 
of  the  business. 

88 1.  Bankruptcy  is  the  legal  condition  of  an  in- 
solvent person  whose  property  has  been  ordered  by  court 
decree. to  be  placed  in  the  hands  of  a  receiver  for  the 
winding  up  of  his  affairs.  The  court  order  may  be  made 
on  petition  of  creditors  who  are  aware  of  the  firm's 
insolvency,  or  believe  that  deception  is  being  practiced 
upon  them,  or  have  reason  to  think  other  creditors  have 
undue  preference;  and  who  bring  the  action  in  bank- 
ruptcy as  a  means  of  securing  their  share  of  the  assets 
rather  than  risk  further  delay.  It  may  be  made  on  peti- 
tion of  the  owner  himself,  who  goes  into  bankruptcy  in 
the  desire  to  turn  over  his  property  to  creditors,  and,  in 
so  doing,  to  escape  further  liability  through  the  pro- 
visions of  the  law. 

One  federal  bankruptcy  law  provides  relief  in  this 
matter,  and  specifies  that  any  person,  except  municipal, 
railroad,  insurance,  or  banking  corporations,  may  secure 
the  benefits  of  this  act  by  becoming  a  voluntary  bank' 
nipt. 

The  bankrupt  is  entitled  to  the  benefit  of  state  ex- 
tmpfcion  laws,  which  permit  him  to  retain  certain  prop- 
erty for  his  personal  use — the  amounts  he  may  retain 
varying  in  different  states. 

88  J.  Executors  and  Administrators  are  officers  ap- 
pointed by  a  court  to  close  up  the  estates  of  deceased 
persons.  The  person  appointed  is  called  an  executor 
when  he  is  named  by  the  deceased  in  his  will,  and  he  re- 
ceives his  court  appointment  because  so  named.  When  no 
executor  is  named  by  the  deceased,  the  officer  appointed 
is  called  an  administrator.  Among  the  duties  of  an  ex- 
ecutor or  administrator  are  to  inventory  and  secure  ap- 


182  RULES 

praisal  of  the  personal  assets  belonging  to  the  estate,  to 
pay  the  debts  of  the  estate  out  of  the  assets,  to  distribute 
the  estate,  and  make  an  accounting  to  the  court.  The 
executor  or  administrator  usually  performs  these  duties 
under  legal  advice.  The  administrator  should  open  a 
separate  set  of  books  for  the  estate,  and  a  bank  account 
of  the  moneys  should  be  kept  as  a  separate  fund.  The 
compensation  of  executors  and  administrators  for  their 
services  is  usually  fixed  by  a  statute  in  the  several  states, 
and  is  a  preferred  expense. 

88  K.  Income  Tax.  Federal  income  taxes  are  levied 
under  provisions  of  two  laws  enacted  by  Congress  in  1916 
and  1917.  Under  these  laws,  two  separate  taxations  of 
two  per  cent  each,  called  the  normal  tax,  are  applicable 
to  net  annual  incomes  exceeding  the  specific  exemptions 
given  below. 

SPECIFIC  EXEMPTIONS 

1916  Law         1917  Law 

Unmarried  persons   $3000.00  $1000.00 

Married  persons  or  heads  of  families 4000.00  2000.00 

Additional  for  each  dependent  child 200.00  200.00 

Over  and  above  the  normal  tax,  an  additional  tax,  or 

surtax,  is  levied  on  incomes  of  individuals  exceeding  the 

amounts  on  the  following  table  wherein  the  rates  of  sur- 
tax are  given : 

Amounts  subject  to  surtax        1916  Law  1917  Law  Total 

From       $5000  to  $7500 None  1%  1% 

7500    "  10000 "  2%  2% 

10000    "  12500 "  3%  3% 

12500    "  15000 "  4%  4% 

15000    "  20000 "  5%  5% 

20000    "  40000 1%  7%  8% 

40000    "  60000 2%  10%  12% 

60000    "  80000 .3%  14%  17% 

80000    "  100000 4%  18%  22% 

100000    "  150000 5%  22%  27% 

150000    "  200000 6%  25%  31% 

200000    "  250000 7%  30%  37% 

250000    "  300000 8%  34%  42% 

300000    "  500000 9%  37%  46% 

500000    "  750000 10%  40%  50% 

750000    "  1000000 10%  45%  55% 

1000000    "  1500000 11%  50%  61% 

1500000    "  2000000 12%  50%      '  62% 

2000000  up  13%  50%  63% 


AUDITING  183 

Partnerships,  as  such,  are  not  recognized,  but  the  in- 
come tax  is  levied  on  the  partners'  individual  shares  of 
the  profits. 

Taxable  Income  is  net  profit  derived  from  invest- 
ments and  business  operations,  or  it  may  be  derived  from 
personal  or  professional  service,  business,  trade,  com- 
merce, dealings  or  lawful  transactions,  interest,  rents, 
dividends,  and  other  receipts  not  brought  about  by  the 
conversion  of  other  kinds  of  capital  into  money.  The 
gross  incomes,  revenues,  or  earnings  of  an  individual  are 
subject,  besides  specific  exemption,  to  the  following 
named  deductions  before  arriving  at  the  amount  return- 
able for  normal  income  tax: 

1.  Necessary  business  expenses  (living  expenses  not 
included). 

2.  Interest  accrued  and  paid  within  the  year  on  in- 
debtedness. 

3.  Taxes,   (except  those  assessed  for  local  benefits 
and  income  tax). 

4.  Losses  in  business   (by  fire,  storm  or  shipwreck 
not  compensated  by  insurance). 

5.  Bad  debts  charged  off. 

6.  Depreciation  charged  off  in  reasonable  amount. 

7.  Interest  on  obligations  of  the  United  States  or 
any  political  subdivisions  thereof. 

8.  Dividends    from    companies    that    have    already 
been  taxed  for  income. 

9.  Other  income  that  has  been  taxed  at  the  source. 
(Nos.  8  and  9  would  be  included  for  additional  tax). 
An  individual  is  subject  to  normal  income  tax  on  his 

profits,  after  deduction  of  the  specific  exemption,  and  the 
above  nine  deductions,  or.  to  additional  tax  on  the  same  in 
excess  of  $5000,  except  that  Nos.  8  and  9  are  not  de- 
ducted in  finding  the  additional  tax. 

Corporations,  joint-stock  companies,  associations,  and 
insurance  companies  are  subject  to  annual  normal  income 
tax  of  two  per  cent  on  all  net  income  under  the  law  of 
1916.  Under  the  law  of  1917,  a  tax  of  four  per  cent  is 
levied.  This  makes  a  total  of  six  per  cent  annual  income 
tax  on  corporations. 


184  RULES 

Returns.  Every  citizen  or  resident  of  the  United 
States  whose  net  income  for  the  year  1917  or  thereafter 
equals  or  exceeds  $2000  if  married,  or  $1000  if  not  mar- 
ried, is  obliged  by  law  to  make  returns  to  the  collector  of 
internal  revenue  for  his  district,  on  or  before  March  1, 
annually. 

The  blank  form  for  this  return  is  furnished  by  the 
collector  of  internal  revenue  to  whom  the  citizen  must 

apply. 

Payment  of  the  income  tax  must  be  made  by  cash, 
check  or  money  order  on  or  before  June  15  following,  to 
the  collector  to  whom  the  return  is  sent. 

Accounts.  Books  of  account  should  be  kept  in  order 
to  make  accurate  returns,  and  the  government  is  encour- 
aging bookkeeping  among  professional  men,  farmers  and 
individuals.  In  the  government  return  form  No.  1040-A, 
suitable  for  incomes  of  $3000  or  under,  separate  accounts 
are  required  of: 

Income  from  salaries,  wages,  commissions,  bonuses 
and  pensions. 

Income  from  business,  farm  or  profession.  From  such 
income  deduction  may  be  made  for  business  expenses  and 
losses,  classified  under  labor;  materials  and  supplies; 
rent,  merchandise  or  live  stock  bought  for  sale ;  wear, 
tear  and  repairs ;  losses  by  fire,  storm,  other  casualties,  or 
theft;  other  business  expenses. 

Income  from  sale  of  land,  buildings  and  other  prop- 
erty, real  or  personal. 

Income  from  rents  and  royalties. 

Dividends  received,  including  stock  dividends. 

Other  income. 

General  deductions  allowed  from  total  income  in- 
clude interest,  taxes  and  contributions  for  religious, 
charitable,  scientific,  or  educational  purposes.  All  of 
these  deductions  are  subject  to  exclusions  fully  explained 
in  the  government  return  forms  before  mentioned. 

89.  Single  Entry  Bookkeeping  is  any  system  of 
bookkeeping  which  lacks  the  completeness  of  double 
entry  in  the  matter  of  equal  debits  and  credits.     It  is 


AUDITING  185 

assumed  that  a  single  entry  bookkeeper  makes  some 
records  for  all  important  transactions,  and  that  these 
records  are  so  kept  as  to  show,  in  a  general  way,  all 
cash  receipts  and  payments,  and  the  amount  of  the  cash 
balance.  The  records  must  necessarily  extend,  also,  to 
accounts  showing  collections  to  be  made  from  customers, 
and  accounts  showing  amounts  owed  to  creditors.  To 
keep  accounts  of  cash  on  hand,  cash  to  be  collected,  and 
cash  to  be  paid,  is  all  that  is  usually  attempted  in  single 
entry  bookkeeping. 

It  is  easier  to  keep  such  single  entry  books  than  to 
keep  books  by  double  entry,  because  no  posting  is  re- 
quired for  any  cash  receipts  or  payments,  except  those 
that  pertain  to  customers'  or  creditors'  accounts.  Ac- 
counts of  property  and  nominal  accounts  are  ignored. 
There  is  no  time  spent  in  locating  errors  outside  of  the 
cash  balance,  because  there  is  nothing  in  the  system  to 
disclose  the  presence  of  errors;  no  time  is  spent  over  a 
trial  balance,  because,  as  there  is  no  attempt  at  equality 
of  debits  and  credits,  there  can  be  no  trial  balance. 

There  are  single  entry  sets  of  books,  however,  in 
which  accounts  of  property,  sales,  and  various  expenses 
are  kept.  Some  large  mercantile  concerns  keep  by 
single  entry,  approximately  all  the  accounts  found  in 
some  double  entry  sets  of  books.  Various  auditing  proofs 
may  give  the  same  sense  of  accuracy  in  single  entry 
books  that  a  trial  balance  does  in  double  entry.  But 
when  single  entry  books  are  so  highly  developed  as  to 
furnish  proof  of  accuracy,  or  keep  accounts  of  property 
and  classified  expenses,  they  entail  more  labor,  with  less 
complete  adjustment  of  accounts,  than  would  a  double 
entry  system  developed  to  the  same  extent. 

It  is  plain,  however,  that  the  original  entries  in 
single  entry  books  can  be  posted  to  whatever  accounts 
the  bookkeeper  desires,  until  a  complete  double  entry 
classification  is  reached. 

89  B.  The  books  ordinarily  referred  to  as  compris- 
ing a  single  entry  system,  consist  of,  (1)  a  day  book,  for 
charge  or  credit  entries;   (2)   a  cash  book  for  cash  re- 


1S6  RULES 

eeipts  and  payments;  (3)  a  ledger  containing  personal 
accounts.  Such  entries  as  are  not  posted  to  the  personal 
accounts,  remain  in  the  original  books  as  memoranda. 
Any  auxiliary  book  may  be  added. 

89  C.  A  common  form  of  single  entry  used  by  shop- 
keepers, consists  of  a  summary  book,  into  which  are 
transferred,  daily,  the  total  receipts  and  payments  of 
cash,  the  total  charge  sales,  and  the  payments  thereon, 
and  sundry  payments,  all  taken  from  the  record  made 
in  a  cash  register.  These  are  recorded  in  the  cash  regis- 
ter automatically,  in  columns  showing  receipts  from 
cash  sales  separate  from  receipts  from  customers  on 
account;  and  payments  from  cash  purchases,  separate 
from  payments  on  account.  A  fifth  column  shows  the 
amount  of  sales  on  account.  A  separate  bill  and  charge 
book  is  kept  for  each  credit  customer.  This  is  a  book 
containing  a  number  of  duplicate  sale  slips,  for  the 
items  sold.  An  original  slip  is  passed  to  the  customer  at 
each  sale,  and  the  duplicate  retained  in  the  book.  The 
total  of  the  customer's  account  is  forwarded  on  the 
duplicates  from  page  to  page. 

The  bills  owed  by  the  shopkeeper  are  kept  in  a 
drawer,  and  taken  out  as  paid. 

Such  a  system  answers  the  purpose  of  keeping  a 
watch  on  cash  and  customers'  accounts.  The  errors  in 
the  customers'  accounts,  however,  which  are  likely  to  be 
numerous,  are  undiscovered  unless  reported  by  the  cus- 
tomer. 

89  D.     "When  a  single  entry  set  of  books  is  used,  the 
net  profit  or  loss   for   an   accounting  period   is  usually 
found  by  comparison  of  the  net  worth  at  the  beginning 
with  that  at  the  close  of  the  period,  as  exhibited  in  finan 
cial  statements. 

It  must  be  remembered,  however,  that  there  are  ordi- 
narily no  accounts  from  which  the  financial  statement 
is  to  be  derived,  except  the  cash  and  personal  accounts; 
all  other  items  are  to  be  entered  in  the  statement  from 
inventory,  or  from  such  papers  and  documents  as  may 


AUDITING  187 

be  found.  Such  statements  as  Nos.  1  and  2  (Book  of 
Forms)  may  be  used. 

89  E.  Single  entry  bookkeeping  always  has  been,  and 
probably  always  will  be,  used  by  small  concerns.  It  is 
defective  in  the  kind  of  account  analysis  that  enables  a 
proprietor  to  know  the  operation  and  results  of  the  busi- 
ness in  detail,  and  judge  the  future  by  the  record  of  the 
past.  It  is  useful  to  those  who  require  only  partial  rec- 
ords of  some  phases  of  their  business,  and  wish  to  keep 
these  records  without  any  well  defined  proofs  of 
accuracy. 

89  F.  To  Change  Single  Entry  to  Double  Entry,  is 
a  simple  process.  After  making  a  statement  of  assets  and 
liabilities,  journalize  it.  (Form  No.  13  A  affords  a  good 
model.)  If  it  is  desired  to  retain  the'old  ledger,  check  such 
accounts  in  the  journal  entry  as  already  appear  in  the 
ledger,  open  new  ledger  accounts  for  the  remainder,  and 
post  them.  After  the  opening  entry  is  posted,  a  trial 
balance  should  be  taken. 

The  books  of  original  entry  may  be  modified  to  suit 
the  business. 

90.  The  Auditor's  Report.  Large  business  houses 
regularly  employ  auditors  to  work  continuously  in  veri- 
fying the  accounts  of  the  different  departments  of  branch 
houses,  of  agencies,  and  of  the  officials.  The  reports  of 
such  auditors  are  made  on  suitable  printed  blanks,  and 
are  made  with  a  view  to  affording  a  collateral  check  on 
the  books.  The  form  of  the  reports  is  the  outcome  of  the 
skill  and  insight  of  the  one  who  devised  it,  and  its  value 
depends  on  its  applicability  to  the  business  in  which  it 
is  used. 

Auditors  are  also  regularly  retained  by  business 
houses  to  review  their  books  annually,  or  oftener  at 
regular  intervals.  When  the  books  are  regularly  audited, 
the  auditor's  first  report  covers  the  entire  matters  under 
consideration  much  more  exhaustively  and  minutely  than 
subsequent  reports.  The  latter  are,  in  a  measure,  based 
upon  the  first. 


188  RULES 

The  report  of  a  complete  audit  includes  the  financial 
and  operative  statements,  divided  with  such  minuteness 
as  the  case  demands.  The  items  in  these  statements  are 
further  explained  by  schedules  and  analysis  sheets,  at- 
tached to  the  statements.  The  report  also  includes  the 
auditor's  letter,  which  reviews  the  main  points  of  in- 
quiry, and  specifies  particularly  any  entries  in  the  books 
not  supported  by  vouchers,  any  irregularities  in  the  books, 
any  defects  in  title  to  the  property,  or  negligence  in  the 
care  of  property  or  claims,  and  any  specific  recommenda- 
tions tending  to  improve  the  methods  of  the  business  or 
the  bookkeeping  system. 


PART  THREE-DEFINITIONS 

INDEX-COMMENTARY  (Revised  1918) 

1.  A  vocabulary  of  business  words  and  terms.  The  present 
edition  is  greatly  enriched  through  the  courtesy  of  Mr.  A.  P.  Rich- 
ardson, Secretary  of  The  American  Association  of  Public  Account- 
ants, by  whose  co-operation  we  are  enabled  to  include  findings  of 
the  various  annual  committees  on  terminology  of  that  Association. 

Definitions  taken  from  these  sources  are  indicated  by  the 
mark  (f )  before  the  definitions. 

2.  An  index  to  topics  in  the  text. 

3.  An  index  to  models  of  books  and  blanks  in  the  Form  Book. 

4.  Standard  abbreviations  and  signs  commonly  used. 

5..  The  rules  for  computing  Interest,  Discount,  Fractional  Re- 
mainders, etc.,  as  used  in  the  laboratory  units  of  the  American 
Bookkeeping  Series. 

Abatement.  An  amount  deducted  for  overcharge,  damage,  or 
discount,  from  a  sum  payable. 

Abstract  of  Accounts.    Prin.  83  D. 

Abstract  of  Postings,  f  A  list  of  ledger  postings  such  as  one 
drawn  off  for  the  purpose  of  proving  the  postings  in  the  ledger 
with  the  books  of  original  entry  or  for  special  information. 

Abstract  of  Title.     Prin.  88  D. 

Acceptance.  (1)  The  act  of  promising  payment  of  a  draft 
by  the  payee,  usually  effected  by  his  writing  the  word  "Accepted," 
followed  by  his  signature,  across  the  face  of  the  draft.  (2)  The 
name  given  to  an  accepted  paper.    Prin.  65;  Form  15  T. 

Accommodation  Paper,  flnstruments  which  the  maker, 
drawer,  acceptor,  or  indorser  signs  merely  as  an  accommodation 
to  another,  reaping  no  financial  benefit  for  so  doing,  unless  paid  a 
commission  for  the  act,  as  is  sometimes  the  case.     See  Prin.  34  B. 

Account.  (Acct.  or  a/c).  fAs  used  in  bookkeeping  means 
(1)  A  single  entry  or  group  of  entries  either  debits  or  credits  or 
both  together  under  a  specific  heading  to  indicate  an  accounting 
condition.     (2)  The  balance  or  result  of  a  group  of  such  entries. 

Accounts.    Prin.  21-21 C. 

Accountant.  fOne  who  by  virtue  of  experience  and  training 
in  accounting  is  qualified  to  review  the  work  of  accountants  and 
bookkeepers. 

Accountancy,  f  Accountancy  is  a  profession,  the  members  of 
which,  by  virtue  of  their  general  education  and  professional  train- 
ing, offer  to  the  community  their  services  in  all  matters  having  to 
do  with  the  recording,  verification  and  presentation  of  facts  in- 
volving the  acquisition,  production,  conservation  and  transfer  of 
values. 

Account  Current,  f  A  running  record  of  current  financial 
transactions  between  two  parties  who  may,  through  the  growth  of 
their  account,  become  debtor  or  creditor  alternately. 

Accounting.  t  Accounting  is  the  science  which  treats  of  the 
systematic  record,  compilation,  and  presentation  in  a  comprehen- 

189 


190  DEFINITIONS 

sive  manner  for  administrative  purposes  of  the  financial  oper- 
ations of  a  business  organization.     See  Prin.  I. 

Accounting  Cost  System,  f  A  system  whereby,  through  an 
adequate  and  comprehensive  classification  of  accounts  in  the  gen- 
eral ledger  and  the  application  thereto  of  the  units  of  goods  sold, 
an  average  unit  cost  is  obtained. 

Accounting  Period.  The  time  between  opening  and  closing  a 
set  of  books. 

Account  Purchase.  A  detailed  record  of  the  cost  of  pur- 
chases made  by  a  purchasing  agent. 

Account  Sales.  An  itemized  statement  issued  by  a  commis- 
sion firm  to  a  consignor,  showing  the  amounts  realized  from  sales, 
the  expenses  and  the  proceeds.     Form  15  Q. 

Account  Sales  Abstract  Book,  f Book  used  for  the  purpose  of 
distributing  debits  and  credits  of  accounts  of  sale  so  that  per- 
sonal accounts  may  receive  their  postings  daily  and  the  impersonal 
accounts  at  fixed  periods,  usually  at  the  end  of  month. 

Account  Sales  Register.     Form  25  C. 

Accounts  Payable,  f  All  accounts  payable  to  creditors. 
Prin.  32. 

Accounts  Receivable,  t  (1)  Accounts  due  from  debtors.  (2) 
The  aggregate  of  outstanding  accounts  receivable  open  on  the 
books  at  any  time.  Whilst  this  account  should  be  confined  strictly 
to  what  its  name  implies,  it  often  covers  such  things  as  advances 
to  employees  on  account  of  salary,  expenses  in  travelers'  hands  un- 
accounted for,  and  other  debit  accounts  not  strictly  accounts  re- 
ceivable.    Prin.  23  D;  Form  18  B. 

Accretion.  fThat  which  has  grown  or  accumulated,  a  term 
used  mainly  as  applying  to  the  growth  or  accumulation  of  income 
under  certain  conditions. 

Accrued.  Added  by  gradual  increase,  as  the  interest  on  a 
note. 

Accrued  Dividend.  fThis  has  the  same  relation  to  a  stock  as 
"accrued  interest"  has  to  bond.  Not  many  stocks  are  sold  with 
"accrued  dividend"  or  "with  dividend,"  and  then  only  in  case  of 
"guaranteed  stocks"  or  stocks  where  the  dividend  is  certain  and 
fixed. 

Active  Account,  f  Bank  deposits  against  which  many  cheques 
are  drawn,  and  at  frequent  intervals ;  accounts  which  show  run- 
ning transactions. 

Active  Partner.  fOne  actively  engaged  in  the  business,  and 
who  incurs  full  liability,  as  distinguished  from  "silent  partner" 
and  "special  partner." 

Acknowledgment.  An  officially  certified  statement  made  to  a 
notary  public  or  other  public  officer  with  seal,  affirming  the  volun- 
tary nature  of  some  act  by  the  acknowledger,  which  act  is  speci- 
fied in  the  instrument. 

Adjustment  Account.  An  English  equivalent  of  the  American 
term,  "controlling  account." 

Administration  Expenses.  fExpenses  incurred  in  connection 
with  the  administration  of  a  business,  usually  the  salary  and  ex- 
penses of  the  executives  and  other  expenses  not  directly  charge- 
able to  specific  operating  or  selling  expenses. 


INDEX-COMMENTARY  191 

Administrator,  f  A  person  named  by  the  probate  court,  or 
other  proper  authority,  to  take  charge  of  the  goods  and  estate  of 
one  dying  without  a  will. 

Advance  Bill.  fThis  is  a  regular  "commercial  bill"  of  ex- 
change, only  drawn  against  goods  to  be  afterwards  shipped  in- 
stead of  against  a  shipment  already  made. 

Adventure  Account,  f Adventure  Account,  or  "Venture  Ac- 
count," is  a  title  frequently  applied  to  specific  shipments  on  con- 
signment when  made  the  subject  of  separate  accounts.  If  at  the 
risk  and  on  behalf  of  the  shipper  as  co-partner  with  others,  the 
account  is  called  a  "Joint  Venture"  and  is  a  form  of  joint  account. 

Advice  Sheet.  fPeriodical  written  report  of  business  trans- 
actions from  branch  office  to  head  office,  made  daily,  weekly,  or 
monthly. 

Affidavit.  A  written  statement  under  oath  and  acknowledged 
before  a  proper  officer.     (See  Acknowledgment.) 

Affiliated  Company,  f  A  company  which  is  related  to  another 
company  through  stock  or  bond  ownership,  operation  agreement  or 
other  mutuality  of  interest. 

Agent  (Agt.)  fA  person  duly  authorized  to  act  on  behalf  of 
another,  or  one  whose  unauthorized  act  has  been  duly  ratified. 
Prin.  88  F. 

Agreement  of  Co-partnership.    Prin.  68 ;  Form  16  H. 

Agreement  of  Incorporation.    Prin.  68;  Form  16  R. 

Allocate.    fTo  place;  to  set  apart. 

Allonge,  f  A  slip  of  paper  attached  to  a  negotiable  instrument 
to  receive  endorsement  for  which  there  is  no  space  on  the  instru- 
ment itself. 

Allowance.  A  deduction  from  a  debt  allowed  to  a  debtor  for 
some  reason  not  considered  when  the  debt  was  made;  an 
abatement. 

Allowance  Reserve.  fAn  account  to  which  should  be  credited 
a  sufficient  amount  to  cover  allowances,  price  differences,  returns 
(other  than  trade  discounts)  that  is  sufficient  to  cover  this  par- 
ticular kind  of  loss  on  outstanding  accounts  receivable. 

Amount  (Amt.)     The  sum  total  of  several  items. 

Amortization.  tThe  gradual  extinguishment  of  the  amount 
of  an  asset,  liability,  profit  or  loss  by  pro-rating  it  over  the  period 
during  which  it  will  exist  or  during  which  its  benefit  will  be  real- 
ized. Specifically,  (1)  The  gradual  extinction  of  a  debt,  as,  for 
instance,  by  means  of  a  sinking  fund.  (2)  The  gradual  reduction 
in  the  valuation  of  an  asset,  thus  anticipating  the  time  when  it 
shall  eventually  become  worthless ;  as  distinguished  from  provision 
for  depreciation  or  replacements  because  of  physical  loss  or  dam- 
age. (3)  The  absorption  in  the  income  or  profit  and  loss  ac- 
counts, during  the  pendency  of  the  debt,  of  a  discount  incurred 
or  of  a  premium  realized  in  the  sale  of  an  obligation,  which  dis- 
count or  premium  may  be  carried  in  the  meantime  in  a  debit  or 
in  a  credit  suspense  account. 

Annuity.  A  sum  of  money  payable  yearly  for  a  given  num- 
ber of  years,  or  during  life. 

Appraisal.  fThe  result  of  a  valuation  of  property  or  assets, 
used  mostly  in  connection  with  the  valuation  of  fixed  assets  of  a 
company  or  corporation. 


192  DEFINITIONS 

Appreciation.    Prin.  24. 

Appurtenance.  Any  minor  property  or  other  thing  of  value, 
pertaining  to  or  dependent  upon  a  property  or  a  business,  as  the 
small  buildings  or  other  improvements  belonging  to  a  lot  or  farm. 

Arbitration.  fThe  determination  of  a  matter  or  matters  in 
dispute  by  the  decision  of  one  or  more  persons  called  arbitrators, 
who,  in  case  they  disagree,  may  call  in  an  umpire  to  make  a  final 
decision. 

Article.     (Art.) 

Articles  of  Co-Partnership.  The  written  agreement,  or  con- 
tract, governing  the  relations  and  mutual  obligations  of  partners. 
Form  16  H. 

Articles  of  Incorporation.    Prin.  68 ;  Form  16  T. 

Assessment,  f An  apportionment  of  or  call  for  definite  con- 
tributions or  payments. 

Assessment  Account.  An  account  to  which  are  carried  from 
Profit  and  Loss  as  debits,  the  amounts  assessed  against  the  dif- 
ferent stock  holders. 

Assets.  fProperty  fixed  or  liquid,  resources  of  any  kind 
capable  of  being  converted  into  money  or  value.  The  term  is 
used  sometimes  as  applying  to  goodwill,  concessions,  franchises, 
deferred  charges,  and  in  English  accounting  even  to  preliminary 
expenses  incurred  in  the  formation  of  a  company.  See  Prin.  13 
and  Prin.  21-30. 

The  following  distinctions  may  be  noted  : 

(1)  Fixed  Assets.  fSuch  assets  as  are  stationary  and  may 
be  regarded  to  a  certain  extent  as  permanent,  such  as  real  estate, 
buildings,  plant,  machinery,  etc. 

(2)  Liquid  Assets.  fSuch  assets  as  are  not  fixed  or  perma- 
nent, but  are  subject  to  conversion  into  cash,  such  as  raw  and 
finished  material,  book  debts,  securities,  etc. 

(3)  Floating  Assets.  fSame  as  liquid,  sometimes  called 
"circulating  assets." 

(4)  Wasting  Assets.  fSuch  fixed  assets  as  in  the  process  of 
working  are  gradually  disappearing  or  wasting  away,  such  as 
mines,  timber  lands,  quarries,  and  other  such  properties. 

Assignment.  A  term  commercially  applied  to  a  transfer  of 
property  in  writing.  Bank  accounts,  mortgage  loans,  and  claims 
of  various  kinds,  accruing,  as,  salary,  growing  crops,  etc.,  are  as- 
signable, and  if  assigned  for  value,  the  assignee  may  collect  or 
possess  them  for  his  own  benefit. 

Assignment  in  Bankruptcy.  The  transfer  of  property  of  a 
bankrupt  assignor  to  the  assignee,  or  person  in  whom  it  is  vested, 
for  the  benefit  of  creditors. 

Assistant.     (Asst.) 

Association,  f  A  business  organization  composed  of  persons 
whose  interests  therein  are  mutual. 

At.     (@). 

Attachment.    A  legal  seizure  of  property  to  satisfy  debt 

Attorney  in  Fact.  fOne  who  acts  under  the  authority  con- 
ferred by  power  of  attorney. 

Audit.  An  examination  of  records  of  account  with  a  view  to 
ascertaining  their  correctness.    Prin.  81-90. 


INDEX-COMMENTARY  193 

Audited  Voucher  Register.  A  columnar-ruled  book  designed 
to  supplant  both  the  purchase  journal  and  creditors'  ledger  by 
showing  in  combined  form  not  only  the  liability  in  favor  of  indi- 
vidual creditors,  but  the  distribution  of  cost  and  expense.  It  is 
supported  by  vouchers  which  gather  together  a  number  of  invoices 
and  eliminate  much  detail  work. 

Audit  for  Accuracy.    Prin.  83-83  D. 

Audit  for  Fraud.    Prin.  85. 

Audit  for  Misappropriation.    Prin.  85  D. 

Audit  for  Suitable  Books.    Prin.  86. 

Audit  for  True  Record.    Prin.  84. 

Audit  for  Worth  and  Earning  Power.    Prin.  87. 

Auditing.    Prin.  81. 

Auditing,  some  legal  aspects  of.    Prin.  68. 

Auditor.  A  person  appointed  to  examine  and  verify  records 
and  accounts.     Prin.  81  B. 

Auditors'  Records  and  Reports.    Prin.  82  D  and  90. 

Auxiliary  Books.  Books  containing  records  additional  to 
those  made  in  the  posting  books.     Prin.  79. 

Available  Assets.  fThose  assets  which  are  available  for  the 
payment  of  debts  (includes  goods  unsold  which  do  not  come  under 
"quick  assets,"  also  may  include  "supplies  for  operation"). 

Bad  Debt-Reserve,  f  An  account  to  which  should  be  credited 
a  sum  sufficient  to  cover  bad  debts  on  outstanding  accounts  (but 
not  trade  discounts  or  allowances). 

Balance.  (Bal.)  The  excess  of  one  side  of  an  account  over 
the  other. 

Balance  Sheet,  f  A  statement  showing  the  financial  position 
of  a  business,  its  assets  and  liabilities,  the  capital  employed 
therein,  as  well  as  any  reserves,  surplus  or  deficiency  there  may 
be  at  a  specific  date. 

Some  accountants  call  any  statement  of  assets,  liabilities  and 
net  worth  a  "balance  sheet;"  others  limit  the  term  balance  sheet 
to  such  a  statement  when  derived  from  the  ledger  accounts,  show- 
ing the  ledger  to  be  in  balance.  The  author  leans  to  the  latter 
view  in  the  discussions  in  the  text. 

Balancing  an  Account.  An  account  is  balanced  by  entering 
the  difference  on  the  lesser  side,  ruling  and  footing  the  two  col- 
umns, and  carrying  the  difference  below  the  ruling  to  the  side 
which  is  greater. 

Balance  of  Trade.  The  difference  between  the  value  of  ex- 
ports and  imports  for  a  given  country  and  period. 

Bales,     (bl.) 

Bank,  (bk.)  A  financial  business  that  offers  the  following 
principal  services  to  the  public:  (1)  Safe  keeping  of  money;  (2) 
Checking  accounts ;  (3)  Loans;  (4)  Collections;  (5)  Exchange  or 
the  transmission  of  funds. 

Bank  Book.  The  book  carried  by  a  depositor  to  contain  the 
banker's  entries  of  deposits  when  made,  and  of  the  depositor's 
checks  paid,  when  such  book  is  balanced  periodically.     Form  15  C. 

Bank  Check.    Prin.  62 ;  Form  15  E. 

Bank  Discount.  A  certain  per  cent  deducted  from  the 
amount  of  future  due  paper  by  a  bank,  for  carrying  the  paper 
to  maturity. 


194  DEFINITIONS 

In  the  laboratory  units  of  the  American  Bookkeeping  Series, 
the  bank  discount  is  computed  on  the  amount  at  the  given  rate, 
for  the  exact  days  from  date  of  discount  to  maturity,  and  each 
day  computed  as  1/360  of  a  year. 

Bank  Draft.     Prin.  62 ;  Form  15  H. 

Banking  Forms.     Prin.  62;  Forms  15A-15L. 

Bankruptcy.    Prin.  88 1. 

Bank  Statement.    Form  20  K. 

Barrels,     (brl.) 

Barter.  To  traffic  or  trade  one  commodity  for  another  with- 
out using  money.  This  is  a  crude  method  of  exchange  which  is 
now  seldom  practiced  by  civilized  people. 

Betterment,  f  Any  addition  to  or  improvement  of  a  property, 
any  expenditure  which  makes  a  property  better  or  more  valuable. 
In  railroad  accounting  betterments  include  the  "enlargement  or 
improvement  of  existing  structures,  facilities,  or  equipment,,  of  an 
improved  or  higher  class  taking  the  place  of  others  previously 
existing."     (Interstate  Commerce  Commission.) 

Bill,  f  A  bill  is  a  promise  to  pay  a  fixed  amount  to  a  stated 
person  at  a  specified  time. 

Bill-Book,  f  An  account  book  in  which  is  kept  a  record  of 
notes  receivable  or  payable  with  the  particulars  thereof,  the  dates 
of  maturity,  etc.     See  Form  13  M. 

Bill  of  Exchange,  f  A  bill  of  exchange  is  an  unconditional 
order  in  writing  addressed  by  one  person  to  another,  signed  by  the 
person  giving  it,  requiring  the  person  to  whom  it  is  addressed  to 
pay  on  demand  or  at  a  fixed  or  determinable  future  time  a  certain 
sum  in  money  to  order  or  to  bearer.     Prin.  88  E. 

Bill  of  Goods  or  Services.  An  itemized  statement  of  goods 
sold  or  services  rendered,  showing  the  amount  payable  for  same. 

Bill  of  Lading.  (B.  L.)  An  itemized  acknowledgment,  by  a 
transportation  company,  showing  list  of  goods  to  be  transported, 
with  shipping  directions,  transportation  charges,  and  other  agree- 
ments as  to  shipment  and  delivery.     Prin.  64;  Form  15  V. 

Bill  of  Sale.  A  document  formally  transferring  ownership 
in  personal  property  from  one  person  to  another.     Form  16  I). 

Bills  Discounted,  trills  of  exchange  or  time  paper  that  have 
been  discounted. 

Bills  Payable.  All  notes,  bills  of  exchange  or  acceptances 
payable  are  termed  bills  payable,  and  may  be  kept  in  one  account 
with  this  heading.     See  Notes  Payable. 

Bills  Receivable.  All  promissory  notes,  time  notes,  bills  of 
exchange,  or  acceptances  receivable  may  be  under  the  general 
term  of  bills  receivable.     See  Notes  Receivable. 

Bills  Receivable  Register.     Form  13  M. 

Blotter.  fCommonly  called  a  book  of  original  entry.  A  book 
in  which  a  first  and  temporary  record  of  transactions  is  made, 
later  to  be  transferred,  "posted,"  into  books  of  more  permanent 
record. 

Board  of  Trade.  An  organization  of  business  men  for  the 
advancement  of  commerce. 

Bona  Fide.    In  good  faith ;  without  deceit  or  fraud. 

Bond.    A  document  or  agreement  under  seal.     The  ordinary 


INDEX-COMMENTARY  195 

commercial  bonds  are  issued  by  the  Government,  the  State,  a 
private  corporation  or  an  individual.  All  promise  the  payment 
of  money,  together  with  Interest  payments  on  the  same.  A  coupon 
bond  has  interest  coupons  attached  which  are  cut  off  and  col- 
lected as  they  mature.    Prin.  25  D. 

Bond  and  Mortgage,  f  An  instrument  whereby  money  at  in- 
terest is  borrowed  on  a  promissory  note  (bond)  secured  by  an 
indenture  or  mortgage  giving  to  the  holder  the  right  to  foreclose 
and  take  possession  by  due  process  of  law  in  case  of  failure  to 
pay  either  principal  or  interest  at  the  appointed  time. 

Bonded  Debt.  fThe  fixed  indebtedness  of  a  municipality  or 
incorporated  company  in  the  form  of  bonds. 

Bonded  Goods.  Merchandise  stored  in  a  bonded  warehouse, 
or  in  bonded  cars,  the  owner  having  given  bonds  securing  the 
payment  of  import  duties  or  of  internal  revenues,  upon  their  re- 
moval or  their  arrival  at  some  inland  city  of  entry,  and  before  a 
specified  time. 

Bond  of  Indemnity,  fin  investment  matters  the  common  use 
of  the  "bond  of  indemnity"  is  in  case  of  a  lost  security.  It  is  a 
form  of  guaranty  protecting  a  corporation  (firm  or  individual)  in 
event  of  presentation  at  some  future  time  of  a  security  which  had 
been  lost  by  the  owner  and  the  corporation  issuing  the  same  had 
issued  a  new  security  in  its  stead. 

Bonds  Account.    Prin.  25  D. 

Bonus.  A  gift  or  extra  allowance  for  a  business  favor  or 
service,  as  the  placing  of  a  loan,  the  making  of  an  investment 
Cities  and  Chambers  of  Commerce  often  grant  bonuses  to  those 
who  establish  new  industries  in   a  city. 

Bonus  Stock,  or  Capital  Stock  for  Promotion.  tBonus  stock 
or  capital  stock  for  promotion  are  terms  used  interchangeably  for 
shares  of  capital  stock  set  aside  as  remuneration  to  the  promoter 
for  the  organization  of  the  business. 

Book  Account.  The  account  kept  in  the  ledger  with  a  person 
to  whom  credit  sales,  or  from  whom  credit  purchases,  are  made. 

Bookkeeping.  tBookkeeping  is  the  art  of  recording  pecuniary 
transactions  in  a  regular  and  systematic  manner.   Prin.  1,  4,  and  5. 

Book  Profits.  fProfits  as  shown  by  tlje  books,  not  necessarily 
actual  or  real,  but  as  shown  by  book  entries. 

Books  Close,  fin  order  that  corporations,  especially  the 
larger  ones,  may  pay  a  dividend,  it  is  necessary  to  fix  an  interval 
of  one  or  more  (lavs'  duration,  during  which  it  is  possible  to  make 
a  correct  list  of  the  stockholders  as  shown  by  the  transfer  books, 
so  that  the  dividends  may  be  sent  to  the  stockholders  as  of  record 
the  date  provided  for  in  the  vote  passed  declaring  the  dividend. 
It  is  desirable  that  no  stock  shall  be  transferred  during  this 
process,  and  it  is.  therefore,  customary  for  most  corporations  to 
"close  their  books."  that  is,  their  transfer  books,  during  such  an 
interval.  This  period  generally  precedes  shortly  the  actual  pay- 
ment of  dividend. 

Books  of  Account.  tAll  books  or  written  records  of  any 
undertaking  in  which  there  are  entries  concerning  its  finances, 
wealth  or  obligations  or  merchandise  movements;  including  also 
records  of  capital  stock  issues  and  transfers  and  minutes  of  direct- 
ors' or  stockholders'  meetings. 


196  DEFINITIONS 

Book  Value.  fThe  value  of  an  asset  as  carried  upon  the 
books,  as  distinguished  from  the  actual  or  market  value  of  such 
asset. 

Books  of  Original  Entry.  Such  books  as  contain  the  first 
entries  of  transactions,  as  opposed  to  ledgers  which  contain  the 
posted  entries.     Prin.  14. 

Bound  Ledger.    Prin.  80  F. 

Bound  Ledger.    Prin.  72  F. 

Boxes.     (Bx.) 

Broker.  One  whose  business  is  to  act  as  agent  in  buying  and 
selling  financial  paper,  stocks  or  other  property  for  others.  His 
charge  for  the  service  is  called  brokerage. 

Budget,  f  A  budget  is  a  statement  of  the  estimated  revenues 
and  expenditures  for  a  given  period. 

Bundles,     (bdl.) 

Burden  Estimate.  An  estimate  of  the  amount  of  the  several 
items  of  manufacturing  expense,  covering  a  future  period  of  one 
month,  one  year,  or  other  time,  for  the  purpose  of  distributing 
such  estimated  expenses  proportionately  to  the  various  jobs  as  the 
latter  are  completed. 

Burden,  or  Overhead  (Cost  Accounting).  Elements  of  cost, 
which  although  they  cannot  be  definitely  assigned  to  any  particu- 
lar job,  or  even  series  of  jobs,  are  a  necessary  part  of  the  ex- 
pense of  manufacture,  and  must  be  taken  into  account  in  calculat- 
ing costs. 

Burden  Rate.  The  manufacturing  burden  is  to  be  distributed 
to  the  several  jobs  in  proportion  to  the  amount  consumed  by  each 
job.  Thus,  the  entire  burden  of  a  month  is  sometimes  divided  by 
the  number  of  hours  in  the  month,  making  a  burden  rate  per  hour, 
or  by  the  value  of  the  material  manufactured,  making  a  burden 
rate  per  dollar's  worth  of  material,  or  by  the  wages  paid  for  labor, 
making  a  burden  rate  per  dollar  in  labor. 

Bushels,     (bu.) 

Business.     Prin.  2. 

Business  Forms.    Prin.  62-69. 

Business  Ledger.  The  part  of  a  complete  ledger  containing 
the  nominal,  or  profit  and  loss,  accounts. 

Business  Organization.  A  business  organization  is  a  com- 
bination of  directing  intelligence,  labor,  capital  and  equipment, 
working  together  to  produce  some  utility,  and  to  sell  it. 

Business  Statement.  A  list  of  the  profits  and  losses  covering 
an  accounting  period,  entered  with  more  or  less  detail  as  the  case 
demands.  Also  called  a  profit  and  loss  statement.  Forms  6,  7, 
7  D,  8,  9,  12  N. 

Buyer.  (1)  The  one  who  makes  the  purchases  for  a  concern. 
(2)  The  manager  of  a  department  in  a  department  store,  who  is 
responsible  for  the  purchases  and  sales  in  his  department. 

Call-Loans,  f  Short- time  investments  often  made  upon  the 
security  or  pledge  of  bonds,  stocks,  goods  or  other  personal  prop- 
erty valued  at  more  than  the  amount  of  the  loan.  Frequently 
these  are  payable  on  demand. 

Capital.  tThis  term  as  used  in  accounting  is  employed  to  ex- 
press (1)  The  sum  of  the  net  assets  of  a  business  or  undertaking, 
or  that  sum  which  remains  after  deducting  the  liabilities  from 


INDEX-COMMENTARY  197 

the  assets  of  a  business  or  undertaking.  (2)  Any  principal  sum 
(usually  in  cash,  sometimes  in  property)  contributed  to  an  under- 
taking by  a  partner  or  individual  for  supplying  the  means  to 
operate  such  undertaking.  (3)  The  value  or  amount  of  interest 
any  individual  has  invested  in  an  undertaking,  and  (4)  Any  prin- 
cipal sum  which  is  used  or  retained  to  produce  income  or  profit. 

Capital  Account,  f  (1)  An  account  opened  and  kept  to  indi- 
cate the  amount  of  capital  a  partner  has  in  a  business,  or  an  ac- 
count showing  the  total  capital  invested  in  a  business.  (2)  The 
term  capital  account  or  capital  accounts  is  used  in  connection  with 
sums  invested  in  permanent  assets,  such  as  real  estate,  plant,  ma- 
chinery, etc.,  these  being  styled  capital  accounts  because  their 
province  is  to  produce  income  or  profit.  See  Prin.  37-39  D ;  Forms 
10E-F,  12  P,  13  P. 

Capital  Assets.  Includes  real  estate,  buildings  and  other 
structures,  equipment  and  other  personal  property  of  a  more  or 
less  permanent  character,  and  cash  on  hand  specifically  applicable 
for  these  purposes. 

Capital  Expenditures,  f All  sums  expended  for  additions  to 
or  improvements  of  properties. 

Capital  Expense.    Prin.  43  A. 

Capital,  Fixed.  fThat  portion  of  the  capital  of  an  undertak- 
ing which  has  been  sunk  in  fixed  assets,  such  as  real  estate,  build- 
ings, machinery,  plant,  etc.,  which  are  not  intended  to  be  sold  but 
used  to  produce  revenue  and  profit. 

Capitalization  of  Earnings.  fThe  issuing  of  securities  based 
upon  a  corporation's  earning  ability ;  the  issuing  of  securities 
upon  which  reasonable  rates  of  interest  or  dividends  can  probably 
be  paid  from  earnings,  rather  than  making  such  issues  equal  in 
face  value  to  the  actual  value  of  the  property. 

Capital,  Nominal.  fThe  full  amount  of  capital  stock  which 
a  company  or  corporation  is  authorized  to  issue. 

Capital,  Paid  Up.  fThat  portion  of  the  capital  which  has 
been  authorized  issued  and  paid  up  by  the  stockholders  or  pro- 
prietors. 

Capital  Stock.  fThe  amount  of  share  capital  issued  or  au- 
thorized by  a  company  or  corporation. 

Capital,  Uncalled.  fThat  portion  of  the  capital  representing 
the  difference  between  the  amount  of  capital  actually  paid  up  and 
the  amount  of  the  face  value  of  the  shares. 

Capital,  Working.  fThat  portion  of  the  net  capital  of  an 
undertaking  which  is  used  or  is  available  for  the  working  of  such 
undertaking,  properly  speaking,  the  liquid  assets  of  such  under- 
taking. 

Card  Ledger.    Prin.  80  H. 

Care  of.     (c/o) 

Carrying  Charges.  fThe  interest  charged  by  brokers  for  the 
amount  of  money  advanced  by  them  to  customers  in  marginal 
transactions.  Also  a  Chicago  Board  of  Trade  term  indicating 
storage  rates,  interest,  and  insurance  on  grain  or  provisions.  , 

Cartage.     ( ctg. ) 

Cases,     (cs.) 

Cash .  f Lawful  money.  Usually  understood  to  include 
cheques  or  such  other  instruments  as  are  received  by  banks  for 
deposit. 


198  DEFINITIONS 

\       * 

Cash  Account.    Prin.  23  D. 

Cash  and  Charge  Record  Book.    Form  17  L. 

Cash  Book.  (C.  B.)  Prin.  84  to  84  H;  Forms  10  A,  10  B, 
11  A,  13  B,  13  L,  13  Q,  17  B,  18  C,  23  E- J,  27  J-K. 

Cash  Discount.  The  allowance  from  the  amount  of  a  sale  for 
immediate  cash  payment.    Prin.  59  B. 

Cashier.  (1)  One  who  has  charge  of  money;  (2)  the  exec- 
utive officer  of  a  bank. 

Cashier's  Account.     (C.  A.) 

Cashier's  Check,  f A  check  drawn  by  a  bank  against  itself, 
and  usually  signed  by  its  cashier. 

Cashier's  Fund.  An  amount  set  aside  from  the  general  cash 
ordinarily  for  current  expenditures  in  money. 

Cash  Journal.    Prin.  73  G ;  Forms  12  W,  17  M,  22  D,  23  I. 

Cents,     (cts.  or  ^.)   ' 

Certificate.  A  written  voucher  attesting  to  some  fact;  as  a 
certificate  of  deposit,  (which  is  a  voucher  that  money  has  been 
deposited  in  a  bank)  ;  a  certificate  of  stock,  vouching  the  owner- 
ship of  stock  in  a  company.    Forms  15  J,  15  W,  18 1. 

Certificate  of  Deposit.    Form  15  J. 

Certificate  of  Deposit  Register.    Form  20  B. 

Certificate  of  Incorporation.  fWhen  it  is  desired  to  form  an 
incorporated  company,  a  paper  called  a  "certificate  of  incorpora- 
tion," or  one  having  a  similar  title,  must  be  filed  with  the  Secre- 
tary of  State  under  which  it  is  desired  to  incorporate.  Prin.  68, 
Form  16  S. 

Certificate  of  Installment.    Form  18  H. 

Certificate  of  Protest.    Form  16  M. 

Certificate  of  Stock.    Prin.  68,  Form  15  W. 

Certified  Check.  A  check  that  has  been  certified,  or  accepted, 
by  the  bank  on  which  it  is  drawn,  making  the  bank  responsible 
for  its  payment.     Form  15  K. 

Certified  Check  Register.    Form  20  C. 

Changing  Single  to  Double  Entry.  Prin.  89  F;  Forms  17  A- 
17  L.  . 

Charge.  To  charge  an  account  means  to  make  an  entry  to 
be  posted  as  a  debit. 

Charges  Against  Operations.    Prin.  54. 

Charter.  (1)  A  document  issued  by  authority  of  the  nation 
or  a  state  defining  the  rights  and  privileges  of  corporations.  (2) 
To  hire  or  let  a  conveyance  of  transportation;  as  a  ship,  a  rail- 
way car. 

Chattel.  Any  kind  of  property  except  real  estate.  Ex- 
amples: merchandise,  notes  and  accounts,  animals,  leases  of  real 
estate,  etc. 

Chattel  Mortgage.    Prin.  67;  Form  16  G. 

Check  or  Cheque,  f  A  written  order  to  banker  to  pay  a  cer- 
tain sum  of  money  to  the  party  named,  on  demand,  on  or  after 
the  date  specified  thereon.    Prin.  62;  Form  15  E. 

Check  Book.    Prin.  62 ;  Form  15  E. 

Checking-Account.  The  account  of  money  deposited  in  a 
bank  subject  to  check. 

Check  Mark.     ( V )     A  mark  placed  opposite  amounts  to  show 


INDEX-COMMENTARY  199 

that  they  have  been  verified  or  posted.  Frequently  the  same 
amounts  are  checked  over  more  than  once.  Different  colored  inks 
should  be  used  in  subsequent  checkings. 

Check  Register.    Form  23  G. 

Check  Sheet  for  Teller.    Form  20  E. 

Check  Stub.     Prin.  74  D ;  Form  15  D,  15  E. 

Chose  (pronounced  shoz).  A  thing  recoverable  by  an  action 
at  law.  A  "chose-in-action,"  is  something  to  which  one  has  the 
right  but  not  the  possession.  Examples:  A  right  to  damages  for 
breach  of  contract  or  for  injury.  Notes,  bonds  and  other  promises 
not  negotiable,  are  commonly  called  choses  in  action,  as  they  evi- 
dence the  right  to  collect. 

Circulating  Cash.  Cash  in  hand  that  may  be  used  to  meet 
the  miscellaneous  payments. 

Classification  of  Accounts,  fin  a  balance  sheet,  the  stating 
of  assets  in  order  relatively  to  the  possibilities  of  quick  realiza- 
tion and  of  liabilities  relatively  to  the  urgency  for  settlement. 

Clearing  Account.  fAn  account  used  to  collect  various 
amounts,  the  aggregate  of  which  is  to  be  pro-rated  and  distributed 
to  other  accounts  leaving  no  balance. 

Clearing  House.  An  association  of  banks  in  a  city  for  the 
purpose  of  daily  adjustment  of  their  claims  against  one  another 
to  be  effected  at  one  time  and  place. 

Close  Corporation,  f  A  stock  company  whose  shares  and  man- 
agement are  in  the  hands  of  a  few  persons,  and  the  stock  of  which 
is  seldom,  if  ever,  publicly  offered. 

Closing  an  Account.  An  account  is  closed,  by  ruling  closing 
lines,  when  it  ceases  to  represent  an  element  in  the  business. 
This  may  be  when  both  debit  and  credit  totals  are  equal,  or  when 
the  difference  between  debit  and  credit  sides  are  carried  to  some 
other  account,  as  when  an  account  is  closed  into  Profit  and  Loss. 
Forms  10  L  to  10  O. 

Closing  Entries  in  Journal.  Prin.  72  H;  Forms  12  0,  12  W, 
14  D-14  F. 

Closing  the  Ledger.    Prin.  80  O. 

C.  O.  D.  Account.    Prin.  23  D ;  Form  14  M. 

Coin.  Metal  impressed  with  the  government  stamp,  and  used 
as  money. 

Collateral  Security.  Papers  owned  by  a  debtor  and  passed 
to  a  creditor  as  security  for  an  obligation. 

Collateral  Loan.  fThe  obligation  or  promise  to  pay  of  an 
individual,  firm,  or  corporation,  on  demand  or  maturing  in  a  year 
or  less  time,  and  which  individual,  firm,  or  corporation  has  de- 
posited with  the  holder  of  the  note,  stocks,  bonds,  or  other  securi- 
ties which,  in  case  of  the  note  not  being  paid  when  due,  may  be 
sold  by  the  holder  of  the  note  and  so  much  of  the  proceeds  of  the 
same  as  may  be  necessary  to  satisfy  the  debt  retained  by  the 
lender,  and  the  balance,  if  any,  returned  to  the  borrower. 

Collateral  Note.  fA  promissory  note  secured  by  stocks,  bonds, 
mortgages,  or  other  securities. 

Collection  Charges.  The  charges  made  by  a  bank  or  cot- 
lector  for  collecting  claims. 

In  the  sets  of  the  American  Bookkeeping  Series  bank  collec- 


200  DEFINITIONS 

tion  charges  are  computed  at  15<£  per  $100,  or  part  thereof,  unless 
otherwise  specified  in  the  transactions. 

Collection  of  Accounts  and  Notes.    Prin.  88  C. 

Collection  Register.     Form  20  H. 

Columnar  Cash  Book.     Prin.  74  H ;  FVms  18  C,  24  F,  25  B. 

Columnar  Expense  Book.     Prin.  74  F ;  Form  12  X. 

Columnar  Journal.     Prin.  73  F ;  Forms  17  M,  18  A,  22  D,  25 1. 

Commercial  Bill,  f  A  draft,  accompanied  by  a  "bill  of  lading" 
and  a  certificate  of  marine  insurance,  drawn  by  a  seller  in  one 
country  against  a  buyer  in  another,  on  account  of  goods  sold  to 
latter. 

Commercial  Discounts.  fNotes  given  by  those  engaged  in 
commercial  enterprises — dry  goods,  hardware,  etc. — upon  which 
the  interest  is  paid  in  advance — "discounted."  Sometimes  the  rate 
of  "discount"  is  meant  by  the  term  "commercial  discount." 

Commercial  Expense.  tThis  term  is  applied  generally  to 
cover  all  expenses  of  doing  business  that  are  not  applicable  to 
the  cost  of  a  material  or  article  manufactured. 

Commercial  Paper.  Bills  of  exchange,  drafts  and  notes  given 
in  the  course  of  trade.     Prin.  88  E. 

Commission.  (Com.)  A  percentage  given  for  the  sale  or 
purchase  of  goods,  or  the  transaction  of  other  business  by  an  agent 

Commissioner  of  Accounts,  f  A  commissioner  of  accounts  is 
an  officer  practically  to  superintend  the  financial  operations  as  to 
receipts  and  disbursements  of  the  city  or  town  by  which  he  is 
appointed. 

Commodity.  A  term  relating  to  everything  movable  that  is 
bought  and  sold.  Examples :  goods,  wares,  merchandise,  the  proo\ 
acts  of  lands  and  manufactures. 

Common  Carrier.  One  who,  for  pay,  engages  to  transport 
goods  or  persons  for  anyone  who  chooses  to  employ  him. 

Common  Law.  Law  based  upon  the  precedent  of  usage, 
rather  than  that  contained  in  the  statutes  enacted  by  legislative 
bodies. 

Common  Stock.  fThat  part  of  the  capitalization  of  a  com- 
pany upon  which  dividends  may  be  paid  only  after  satisfying  the 
requirements  of  the  floating  debt,  bonds  and  "preferred  stock,"  if 
any. 

Compact.     An  agreement  or  contract  between  parties. 

Company.  (DA  corporation  or  an  association.  (2)  A  term 
used  in  a  firm  name  to  designate  other  partners  whose  names  are 
not  given. 

Compound  Entry.  An  entry  consisting  of  more  than  one  debit 
or  credit.     Form  13  A. 

Complete  Expense  Account.    Prin.  53. 

Complete  Journal.     Prin.  73  C ;  Form  12  A. 

Complete  Ledger.    Prin.  80  B. 

Compromise.  An  agreement  to  settle  a  claim  by  paying  or 
receiving  only  a  part  of  the  amount  To  adjust  any  kind  of  busi- 
ness differences  by  an  agreement  based  upon  mutual  concessions. 

Concern.  A  general  term  referring  to  a  business  and  its  own- 
ers, in  the  sense  of  an  organization  to  accomplish  some  under- 
taking. 


INDEX-COMMENTARY  201 

Condition  of  Business.  The  result  shown  by  a  financial  state- 
ment. The  condition  depends  on  the  amounts  and  kinds  of  as- 
sets and  liabilities. 

Consideration.  The  material  cause  of  a  contract.  The  thing 
promised,  or  the  reason  for  the  promise. 

Consignee.    One  to  whom  goods  are  sent. 

Consignment.  (Const.)  Goods  consigned  to  an  agent  to  be 
sold. 

Consignment  Charges  Account.  An  account  charged  by  a 
commission  house  for  cash  paid  on  consignments  received,  such 
payments  to  be  later  deducted  from  proceeds  of  sales. 

Consignment  Sales  Account.  An  account  credited  by  a  com- 
mission house  for  sales  of  consignment  goods,  and  charged  when 
such  sates  are  accounted  for  to  the  consignors.     Form  15  Q. 

Consignor.     One  who  sends  or  consigns  goods. 

Consolidated  Balance  Sheet,  f  A  balance  sheet  which  exhibits 
the  combined  financial  condition  of  a  number  of  business  organiza- 
tions. 

Consumer.  The  person  that  uses  up,  appropriates  to  himself, 
or  changes  the  character  of  a  utility  received. 

Construction  Account.  tAn  account  employed  to  show  the 
cost  of  construction  of  a  piece  of  property.  It  is  usually  made  to 
contain  all  items  (such  as  material,  labor,  expense),  entering  into 
the  work  and  in  some  cases  interest  on  borrowed  money  is  charged 
against  this  account,  and  even  the  discount  on  the  sale  of  bonds 
issued  for  the  work. 

Contingent.  Not  certain.  Contingent  assets,  Prin.  28  G ;  con- 
tingent liabilities,  Prin.  34 ;  contingent  fund,  Prin.  23  C. 

Contract,  f  A  contract  is  an  agreement,  based  upon  a  cause 
or  consideration  between  two  or  more  persons,  to  do,  or  to  abstain 
from  doing,  some  particular  act  or  thing. 

Controlling  Account,  f  An  account  usually  kept  in  the  general 
ledger  of  a  business  and  is  supposed  to  control  a  number  of  sep- 
arate or  detail  accounts  kept  in  another  book  or  ledger.  It  is 
properly  an  account  kept  to  contain  the  totals  of  the  debits  and 
credits  of  a  number  of  accounts  in  order  to  show  at  any  time  the 
balance  of  the  aggregate  of  these  accounts.  It  is  used  mainly  in 
connection  with  accounts  receivable  and  accounts  payable.  Prin. 
21  C;  Form  18  B. 

Controlling  Interest.  fWhen  one  person,  or  a  number  to- 
gether for  their  mutual  benefit,  obtain,  by  ownership  or  by  proxies, 
their  right  to  cast  the  votes  for  a  majority  of  the  shares  of  stock 
in  any  corporation,  such  person  or  persons  are  said  to  have  a  "con- 
trolling interest." 

Convertible.  Capable  of  being  turned  into  money,  or  other 
equivalent,  as  a  convertible  bond  or  other  security. 

Co-Partnership.  The  condition  effected  through  the  joining 
of  two  or  more  persons  into  one  firm  for  the  purpose  of  carrying 
on  any  enterprise ;  a  partnership.     See  Form  16  H. 

Copyrights  Account.    Prin.  28  B. 

Corporation,  f  A  corporation  is  an  artificial  body  created  by 
law  deriving  all  its  powers  from  the  law  which  granted  the  char- 
ter by  which  the  corporation  is  privileged  to  carry  on  business, 
as  set  forth  in  its  articles  of  incorporation.    Prin.  88  H. 


202  DEFINITIONS 

Correspondence.    An  interchange  of  letters. 

Correspondents.  (1)  Banking  firms  and  collection  agencies 
with  whom  a  bank  has  accounts  are  called  its  correspondents.  (2) 
Any  one  with  whom  business  is  carried  on  by  means  of  letters. 

Cost  Accounting.  The  branch  of  accounting  that  has  to  do 
with  gathering  the  items  of  expenditure  applied  to  a  single  piece 
of  work,  or  a  single  job,  or  some  unit  manufactured.  General 
accounting  includes  the  records  of  the  cost  of  conducting  the  busi- 
ness as  a  whole,  while  cost  accounting  includes  the  records  of  the 
cost  of  producing  or  maintaining  certain  units  separately 
considered. 

Cost  of  Merchandise.    Prin.  23  G. 

Cost  Ledger.  fThe  books  in  which  the  individual  "job  ac- 
counts" showing  the  various  elements  entering  into  the  cost 
thereof  are  kept. 

Cost  of  Sales.  fThe  cost  of  producing  or  manufacturing  the 
material  or  goods  sold. 

Coupon,  f  Interest  coupons  are  small  certificates  attached  to 
that  part  of  the  bond  representing  the  principal  sum,  each  coupon 
representing  the  interest  upon  the  bond  for  a  certain  period,  there 
being  attached  to  each  bond  a  sufficient  number  of  these  coupons 
to  represent  the  interest  for  the  entire  length  of  time  which  the 
bond  may  be  outstanding  before  maturity. 

Coupon  Bonds.    Bonds  with  interest  coupons  attached. 

Covenant.    A  mutual  agreement  under  seal. 

Credentials.    Testimonials  giving  authority. 

Credit.  (1)  Trust  given  to  a  debtor.  (2)  Mercantile  reputa- 
tion entitling  one  to  be  trusted.  (3)  (Cr.)  The  side  of  an  account 
on  which  we  enter  all  values  yielded  from  the  source  represented 
by  the  title. 

Creditor.     (Cr.)     One  giving  credit;  one  whom  we  owe. 

Creditors'  Ledger.  fThe  creditors'  ledger  contains  the  indi- 
vidual account  of  each  trade  creditor. 

Cumulative.  fThis,  as  a  rule,  has  reference  to  "preferred" 
shares  of  stock.  Unpaid  dividends  upon  such  stocks  accumulate 
from  year  to  year  and  must  be  paid  before  the  common  or  other 
stocks  which  come  after  can  receive  anything.  A  "cumulative" 
issue  often  acts  to  the  detriment  of  the  common  shares,  as  it  nat- 
urally lessens  the  chances  of  dividends  upon  them. 

Currency.  Paper  money  as  distinguished  from  coin.  In  a 
broader  sense,  the  entire  circulating  medium  of  exchange. 

Current  Assets.    Prin.  23-23  M. 

Current  Liabilities,  f Amounts  owed  subject  to  constant 
change,  such  as  accounts  payable,  loans  payable,  bills  payable,  in- 
terest and  dividends  accrued  towards  the  next  payments,  pay- 
rolls, etc.  Floating  indebtedness  of  all  kinds  comes  under  this 
heading.    Prin.  32. 

Customers.  The  persons  to  whom  the  business  regularly  sells 
its  goods  or  services. 

Customers'  Ledger.  fThe  customers'  ledger  contains  the  in- 
dividual accounts  of  each  customer  or  trade  debtor. 

Custom  House.  The  place  where  government  duties  are 
collected. 


INDEX-COMMENTARY  203 

Daily  Balances.  fTrust  companies,  as  a  rule,  and  sometimes 
other  banking  institutions,  allow  interest  to  their  depositors  upon 
"daily  balances"  of  over  a  certain  amount,  say  $300  or  more. 

Daily  Statement  Book  for  Bank.    Form  20  K. 

Daily  Audit  Sheet.    Form  17  N. 

Daily  Balance  Slip.    Form  17  K. 

Day  Book  (D.  B.)  fOne  of  the  account  books  used  in  single- 
entry  bookkeeping,  another  name  for  which  is  "blotter."  See  Prin. 
71 ;  Form  17  A. 

Days,    (ds.) 

Days  of  Grace.  Three  days  allowed  after  the  date  fixed  for 
payment  of  notes  and  other  negotiable  instruments  before  the 
paper  is  legally  due.  Days  of  grace  have  been  abolished  in  all 
but  nine  states.  States  still  retaining  days  of  grace  may  be  found 
by  referring  to  "Interest  Laws"  in  this  Index-Commentary- 
Dead  Weight  Expenses,  fin  cost  accounting  a  term  some- 
times used  to  indicate  certain  expenses,  such  as  rent,  taxes,  power, 
insurance,  heating,  lighting,  etc.,  because  such  expenses  are  pay- 
able whether  the  volume  of  work  done  is  small  or  large. 

Debentures,  f  A  long  term  unsecured  promissory  note  so 
designated  in  the  instrument.  The  term  debenture  bond  is  a 
misnomer. 

Debenture  Bonds,  f  Debenture  bonds  may  be  said  to  be  bonds 
issued  in  much  the  same  manner  as  shares  are  issued  to  preferred 
stockholders,  and  the  holders  thereof  may  be  termed  preferred 
creditors. 

Debit.  An  entry  to  indicate  the  receipt  of  cash,  or  the  cost 
to  the  business  of  some  business  utility  other  than  cash.  Debits 
are  entered  in  the  left  of  the  two  money  columns  of  an  account. 

Debit  and  Credit.    Prin.  72-72  I. 

Debt.    The  amount  owed  by  one  to  another. 

Debtee.    fOne  to  whom  a  debt  is  due;  accreditor. 

Debtor.     (Dr.)     The  one  who  owes  an  amount. 

Deed,  f  A  document  in  writing  (generally  a  printed  form  to 
be  filled  out  in  writing  is  used)  rendered  authentic  by  the  seal  of 
the  party  whose  intention  it  is  supposed  to  declare;  in  practice,  a 
document  used  for  the  purpose  of  transferring  the  title  of  real 
property  from  one  to  another.  In  law  a  "deed"  is  any  instru- 
ment bearing  a  seal.     See  Form  16  A. 

Defalcation.  (1)  An  abatement  or  discount;  (2)  also,  an 
embezzlement.    Prin.  85  C. 

Defaulter.  A  person  who  fails  to  account  for  money  or  prop- 
erty intrusted  to  him,  usually  applied  to  custodians  of  public 
funds. 

Deferred  Annuity.  fA  fixed  sum  of  money  payable  yearly, 
but  the  payment  of  which  does  not  begin  until  the  expiration  of 
a  certain  time  or  after  the  happening  of  some  event,  as  the  death 
of  a  person. 

Deferred  Assets,  f  Assets  that  have  no  tangible  or  permanent 
value,  but  which  represent  expenditures  for  the  benefit  of  a  future 
period,  and  for  that  reason  are  carried  on  the  books  and  gradu- 
ally absorbed.     Prin.  28  D. 

Deferred  Charges.  tThat  part  of  operating  expenditures  paid 
within  a  given  period  which  is  not  properly  a  charge  against  the 


204  DEFINITIONS 

income  of  that  period  and  which,  therefore,  is  deferred  or  post- 
poned until  a  period  following. 

Deferred  Credit  to  Income.  fAn  item  containing  an  element 
of  profit,  the  benefit  from  which  is  deferred  to  a  subsequent  ac- 
counting period. 

Deferred  Liability.  tAn  obligation  accrued  but  not  payable 
until  some  future  date. 

Deferred  Operation  Credits,  friability  values  representing 
receipts  for  which  value  has  not  been  rendered,  as  an  advance 
payment  received  for  contract  to  perform  certain  work  which  has 
not  been  performed,  but  on  which,  when  performed,  the  payment 
will  apply. 

Deferred  Stock.  fThe  name  given  to  a  class  of  stock  upon 
which  the  payment  of  the  interest  or  dividend  is  deferred  until 
some  other  prior  securities  have  received  theirs  in  full. 

Deficiency.  fThe  term  "deficiency"  without  further  qualifica- 
tions signifies  the  insufficiency  of  the  assets  or  funds  of  a  business 
or  estate  to  meet,  discharge  or  satisfy  its  claims,  liabilities  or 
obligations. 

Deficit,  f  (1)  An  excess  of  expenditures  over  income.  (2) 
Any  balance  of  liabilities  over  assets. 

Del  Credere,  f  A  commission  charged  by  a  broker  or  factor 
who  guarantees  the  solvency  of  the  customer  for  whom  he  tran- 
sacts business. 

Delivery.    The  transfer  of  money  or  property  to  another. 

Demand.'  A  formal  presentation  of  a  claim. 

Demand  Loan.  fA  form  of  note  or  promise  to  pay,  the  bor- 
rower having  the  right  to  pay  off  the  loan  at  any  time — pre- 
sumably not  the  same  day  it  is  made — and  likewise  the  lender 
the  right  to  demand  payment,  Sundays  and  legal  holidays  being 
excepted  in  each  case. 

Demurrage.  fWhen  any  vehicle  of  transportation,  such  as  a 
car  or  vessel,  is  detained  beyond  the  time  allowed  either  for  load- 
ing or  unloading  a  per  diem  charge  called  "demurrage"  is  made. 

Department.     (Dept.)     Dept.  Expense,  Prin.  54  F. 

Departmental  Accounts,  f  A  system  of  accounts  which  relate 
to  the  separate  workings  of  the  departments  of  any  concern 
usually  in  relation  to  the  profit  or  loss  shown  by  such  departments. 

Depletion.     Prin.  58  D. 

Deposit.  (Dep.)  The  funds  left  in  a  bank  for  safe  keeping, 
or  on  checking  account. 

Deposit  Ticket.     Form  15  B. 

Deposition.  Testimony  of  a  witness  legally  taken  and  com- 
mitted to  writing  by  a  qualified  official. 

Depositor.  tOne  who  places  money  in  a  bank ;  that  is,  makes 
a  deposit,  is  the  usual  meaning  in  banking  affairs ;  but  a  depositor 
may  be  one  who  commits  securities,  valuable  papers,  or  anything 
to  the  care  of  another,     (a) 

Depositor's  Statement.    Prin.  62;  Form  15  G. 

Deposit  Slip.    Form  15  B. 

Depreciation.  tAs  understood  and  used  in  accounting  the 
measure  of  deterioration  in  value  by  reason  of  wear  and  tear,  de- 
cay, or  other  causes,  of  property,_  plant,  machinery,  and  other 
assets.     Prin.  24. 


INDEX-COMMENTARY  205 

i 

Depreciation  Account,  f An  account  containing  charges  for 
depreciation,  the  balance  of  which  is  transferred  periodically  to 
Profit  and  Loss  account.     Prin.  54. 

Depreciation  Fund,  f A  fund  set  aside  usually  created  out  of 
earnings,  to  provide  for  depreciation  of  plant,  property,  etc. 

Depreciation  Reserve,  f  An  amount  set  aside  out  of  earnings 
and  carried  as  a  credit  to  offset  any  deterioration  of  assets  which 
has  taken  place  or  is  likely  to  arise. 

Deputy.  A  person  appointed  to  act  in  the  place  of  a  public 
official. 

Detail  Sheet.  A  columnar  sheet  used  to  divide  the  items 
making  up  one  account  into  several  subdivisions.  See  Forms  18  M, 
18  N,  25  D. 

Detail  Strip  from  Cash  Register.    Form  17  J. 

Diminishment.     Prin.  54. 

Direction  on  Shipping  Case.     Form  18  J. 

Direct  Labor.  fAlso  called  "productive  labor."  Labor  that 
can  be  charged  directly  to  an  article  or  group  of  articles. 

Directors.  The  persons  chosen  to  manage  the  affairs  of  a 
company  or  corporation.  The  stockholders  of  banks,  railroad 
companies  and  other  corporations  are,  as  a  rule,  so  numerous  and 
reside  so  remotely  one  from  another,  that  it  is  physically  as  well 
as  legally  necessary  to  select  a  small  body  of  directors  from  their 
number,  to  act  together  in  the'  general  management.  Directors 
are  usually  elected  annually. 

Disbursements.  fCash  payments  made  during  stated  period, 
regardless  of  the  purpose  of  the  payment. 

Discount  Account,  fin  bookkeeping  practice,  this  account  ap- 
pears to  be  charged  with  the  following:  (1)  The  discount  paid 
or  allowed  to  customers  on  the  payment  of  their  accounts.  (2) 
The  amount  paid  to  bankers  or  brokers  for  discounting  bills  re- 
ceivable or  accommodation  paper.  (3)  Sometimes  interest  paid 
on  loans.  The  difference  between  the  amount  realized  on  the  sale 
of  bonds  or  securities  and  their  par  value  is  called  discount.  This 
is  sometimes  capitalized  and  carried  as  an  asset,  and  sometimes 
as  a  suspense  item  to  be  charged  off  gradually. 

Discounting.  Transferring  to  a  bank  or  broker  notes  receiv- 
able or  other  time  paper,  for  an  amount  in  cash  less  than  the 
amount  collectible  at  maturity.  The  one  disposing  of  the  notes  is 
usually  liable  for  their  payment  on  failure  of  the  maker  to  pay. 

Discount  on  Bonds  Account.  The  account  chargeable  for  the 
difference  between  face  and  amount  realized  from  issue  of  bonds, 
made  by  a  company,  and  sold  below  par. 

Discount  Reserve,  f  An  account  to  which  should  be  credited 
a  sufficient  amount  to  cover  trade  discounts  on  outstanding  ac- 
counts receivable. 

Discount  Ticket.     Form  15  L. 

Discretionary  Pool.  fFor  all  practical  purposes  the  same 
thing  as  a  "blind  pool;"  at  least,  the  one  in  control  is  allowed 
entire  freedom  to  do  as  he  sees  fit  with  the  interests  of  all. 

Dishonor.  Refusal  by  a  debtor  to  accept  or  to  pay  commer- 
cial paper  when  it  is  presented. 

Dissolution  of  Partnership.  fDissolution  of  partnership  is 
the  act  of  breaking  up  an  association  formed  for  the  purpose  of 


206  DEFINITIONS 

trade,  or  the  act  of  retiring  from  such  association  of  one  or  more 
of  the  parties  concerned. 

Distribution  of  Net  Profit  or  loss.  Sole  proprietorship, 
Prin.  60. 

Distribution  Register,  f  A  columnar- ruled  book  of  account  in 
which  purchases,  wages,  expenses  or  other  amounts  may  be  re- 
corded an<J  divided  into  classifications  or  allotted  to  separate  ac- 
counts in  the  same  process.     (Not  a  voucher- register. ) 

Dividend.  (Div.)  The  share  in  profits  passed  to  a  stock- 
holder. 

Dividend  Account.  An  account  credited  from  Profit  and  Loss 
or  Surplus,  when  dividends  are  declared,  and  charged  when  such 
dividends  are  paid  to  stockholders. 

Dividend  Book.  fThe  dividend  book  shows  a  record  of  every 
dividend  declared  by  the  directors,  the  shares  held  by  each  stock- 
holder, the  amount  of  dividend  to  which  each  stockholder  is  en- 
titled, together  with  each  stockholder's  signature,  showing  the  re- 
ceipt of  the  dividend. 

Dividend  in  Liquidation.  fWhen  a  business  or  industry  of 
any  kind  is  being  wound  up,  closed  out,  "liquidated,"  and  money 
paid  from  time  to  those  to  whom  it  is  due,  the  creditors,  stock- 
holders, owners  of  the  business,  depositors  (in  case  of  a  bank), 
etc.,  these  payments  are  called  "dividends  in  (process  of)  liquida- 
tion." 

Dividend  Reserve  Account.  fFor  the  purpose  of  equalizing 
the  payment  of  future  dividends,  i.  e.,  to  permit  a  company  in  a 
bad  year  to  pay  its  dividend  upon  shares  at  the  same  rate  per 
cent,  as  it  had  done  in  previous  years. 

Documentary  Bill,  f  A  "bill  of  exchange"  accompanied  by  a 
"bill  of  lading,"  insurance  policy  and  invoice  covering  the  ship- 
ment of  goods,  which  papers  show  the  security  which  is  behind 
the  bill  of  exchange. 

Dollars.     ($) 

Donated  Stock,  f Capital  stock  of  any  given  corporation 
which  once  having  been  issued  for  value  is  presented  to  the  com- 
pany, usually  for  the  purpose  of  being  sold  to  raise  working 
capital. 

Dormant  Partner,  f A  dormant  partner  is  one  who  invests 
capital  but  takes  no  part  in  controlling  or  directing  the  affairs 
of  the  firm. 

Double  Entry.  (D.  E.)  A  method  of  bookkeeping  in  which 
the  required  debits  and  credits  for  all  transactions  are  equal. 
Prin.  70. 

Dozen,     (doz.) 

Draft,  (dft.)  An  order  drawn  by  one  party  (the  drawer), 
directing  a  second  party  (the  drawee),  to  pay  a  sum  of  money  to 
the  order  of  a  third  party  (the  payee).    Prin.  65;  Form  15T-TJ. 

Draft,  Accepted.    Form  15  U. 

Draft  Register.     Form  20  D. 

Drawee.    The  person  on  whom  checks  or  drafts  are  drawn. 

Drawer.    The  person  issuing  a  check  or  draft. 

Drawing  Account,  f  An  account  to  which  current  transac- 
tions affecting  a  partner  are  debited  or  credited  for  the  purpose 
of  keeping  them  apart  from  the  capital  account.  An  allowance 
made  to  salesmen  or  other  employees  for  salary  or  expenses. 


INDEX-COMMENTARY  207 

Drayage.    Charges  made  for  transfer  of  goods  by  dray. 

Due-Bill.    A  written  acknowledgment  of  a  sum  owed. 

Duplicate.  A  copy.  Duplicate  bills  consist  of  one  original 
and  one  copy. 

Duplicate  Billing  Systems.    Prin.  75  C  and  75  D. 

Each,     (ea.) 

Earned  Shop  Cost.  An  added  value  placed  on  material  In 
process  of  manufacture,  when  taking  inventory. 

Earnest.  An  initial  part  payment  or  delivery  to  secure  a 
verbal  contract  of  sale. 

Economic  Account^.  fWhenever  any  increase  or  decrease  of 
wealth  is_  realized  or  recognized  it  is  recorded,  according  to  its 
nature,  in  one  of  these  subordinate  accounts,  which  we  shall  call, 
as  a  whole,  the  economic  accounts. 

Eleemosynary  Institution.  One  supported  by  charity,  or  pub- 
lic funds,  as  a  free  hospital,  or  asylum. 

Embezzlement.  The  act  of  a  trustee  or  other  agent,  of  un- 
lawfully converting  to  his  own  use  money  or  property  in  his  pos- 
session which  belongs  to  another. 

Encumbrance.  A  claim  or  lien  against  property  which  dimin- 
ishes its  asset  value. 

Endorsement.  Any  subsequent  writing  on  the  back  or  face 
of  commercial  paper,  which  affects  the  terms  or  conditions  of 
payment.     Form  15  F. 

Entries.  Original,  Prin.  71-71 1 ;  typical  journal  entries, 
Prin.  72-72  H. 

Entry  Tickets.     Forms  23  C,  23  F,  23  L. 

Equipment  Account.    Prin.  24  E;  Form  10  D. 

Equity.  f  The  common  meaning  in  reference  to  investments  is 
the  value  in  the  property  over  and  above  its  indebtedness ;  for  in- 
stance, to  the  stockholders  of  a  railroad  belongs  its  "equity."  In 
case  of  a  mortgage  upon  real  estate,  the  value  of  the  property 
above  the  mortgage  would  be  the  "equity."  The  net  value  of  a 
thing  after  deducting  any  incumbrances,  more  particularly  of  real 
estate. 

Errors  of  Fraud.  fErrors  of  fraud  are  those  made  with 
fraudulent  intent. 

Errors  of  Omission.  fErrors  of  omission  are  items  left  out 
carelessly  or  maliciously. 

Errors  of  Principle.  fErrors  of  principle  are  those  made  by 
persons  not  acquainted  with  accounts. 

Escrow.  A  deed,  bond,  or  other  written  engagement,  deliv- 
ered to  a  third  person,  to  be  held  by  him  until  some  act  is  done 
or  some  condition  performed,  and  then  by  him  to  be  delivered  to 
the  grantee. 

Establishment  Expenses,  fin  cost  accounting  those  expenses 
which  cannot  be  charged  directly  against  the  cost  of  an  article 
manufactured  but  are  spread  over  "a  volume  of  work,  are  some- 
times called  "establishment  expenses."  They  include  such  items 
as  taxes,  insurance,  heating,  lighting,  indirect  labor  and  miscel- 
laneous expenses. 

Estate  Account,  fin  executorship  accounting  an  estate  ac- 
count is  opened  to  show  the  net  value  of  the  estate  by  crediting 
thereto  all  the  assets  of  the  estate  as  well  as  any  profits  derived 
from  their  realization,  and  charging  thereto  all  liabilities  as  well 


208  DEFINITIONS 

as  funeral  and  administration  expenses,  and  losses  on  realization 
of  assets. 

Estimate  Book  for  Lumber.     Form  17  R. 

Examination  (or  Bank  Examination).  fWhat  is  usually 
understood  in  commercial  accounting  as  a  balance  sheet  audit,  i.  e., 
a  count  and  verification  of  the  balances  of  asset  and  liability  ac- 
counts shown  by  the  books  as  of  the  close  of  business  on  any  given 
date.  This  is  the  most  common,  one  might  almost  say  universal, 
work  that  is  done  by  accountants  for  banks.  In  only' a  very  few 
instances  can  the  work  be  termed  an  audit,  as  understood  in  com- 
mercial accounting. 

Exchange,  Domestic.  t(l)  The  cost  of  collecting  out-of-town 
checks  in  the  United  States  and  Canada,  as  distinct  from  foreign 
exchange,  which  has  to  do  with  the  purchase  and  sale  of  foreign 
bills,  etc.     (2)  Premium  on  bank  drafts. 

Note. — In  the  laboratory  units  of  the  American  Bookkeeping 
Series,  exchange  on  bank  drafts  is  computed  at  10  cts.  for  every 
hundred  dollars  and  additional  amount  of  $50.  On  a  single 
amount  of  less  than  -$50,  5  cts.  bank  exchange  is  allowed  when 
purchasing  a  draft;  when  the  draft  is  for  hundreds,  no  exchange 
is  charged  on  an  additional  amount  less  than  $50. 

Ex-Dividend.  A  term  used  to  describe  stock  sold  after  the 
transfer  books  are  closed.  The  seller  of  the  stock  receives  the 
dividend,  the  buyer  receives  the  stock  without  the  dividend. 

Execution.  (1)  The  written  authority  given  by  a  court  to  an 
officer  directing  him  to  enforce  a  judgment.  (2)  The  act  of  sign- 
ing and  sealing  a  legal  instrument. 

Executor.  fAn  executor  is  a  testator's  personal  representa- 
tive named  in  his  last  will  and  testament. 

Expenditure.  fThis  term  is  often  used  by  accountants  to  in- 
dicate disbursements  of  money  only.  In  other  cases  expenditure 
is  used  to  indicate  not  only  that  which  has  been  disbursed  but 
incurred  as  well,  and  in  this  sense  it  is  mostly  used. 

Expense  Account.  fExpense  is  either  the  title  of  an  account 
or  a  general  term  applied  to  a  series  of  accounts  for  recording  the 
expenditures  incidental  to  the  management  of  a  business  or  enter- 
prise, for  which  no  permanent,  subsequently  convertible,  or  sub- 
stantial value  is  received,  as,  for  instance,  rent,  insurance,  clerk 
hire,  etc.     Prin.  53-58  D. 

Expense  Book.    Prin.  74  F ;  Form  12  X,  18  N. 

Expenses  Divided.    Prin.  43  A. 

Extension.  The  results  computed  from  a  certain  column  or 
columns  of  figures,  and  carried  to  another  column. 

Exterior  Accounts,  f Exterior  accounts  are  those  that  alone 
affect  persons  outside  of  the  business. 

Face.  The  principal  sum  of  money  written  in  a  note,  draft, 
check  or  other  commercial  paper,  as  contrasted  with  the 
"amount,"  which  is  the  principal  sum  and  interest  added. 

Factor.    An  agent  or  commission  dealer. 

Factory  Account.  fAn  account  kept  in  the  general  ledger  of 
a  manufacturing  business  which  serves  as  a  controlling  account 
of  the  factory  ledger. 

Factory   Cost.    jThe   material,   labor    and    indirect   expense 


INDEX-COMMENTARY  209 

cost  of  any  article;  i.  e.,  all  expense  necessary  to  manufacture  an 
article. 

Factory  Ledger.  fThe  factory  ledger  is  that  record  in  cost 
accounting  which  arranges  and  classifies  the  information  con- 
tained in  the  original  factory  records. 

Factory  Overhead,  fin  cost  accounting,  overhead  factory  ex- 
pense, or  labor  and  expense  not  directly  apportionable  to  specific 
increments  of  production.     Prin.  23  L. 

Factory  Supplies.  fMiscellaneous  supplies  consumed  in  the 
process  of  manufacture  or  maintenance  of  the  factory. 

Filing..    Prin.  69. 

Finances.  Funds  or  money.  Financial  operations  are  those 
involving  the  receipt  and  payment  of  cash. 

Finance  Bills,  f "Bills  of  exchange"  (which  must  first  be 
understood)  on  foreign  countries  issued  by  American  bankers 
against  credits  or  loans  granted  them  by  bankers  in  other  coun- 
tries, and  not  against  shipments  of  goods. 

Financial  Records.    Prin.  4. 

Financial  Statement.    Prin.  10. 

Finished  Goods  Ledger,  f  A  subsidiary  ledger  controlled  by 
the  finished  goods  account  in  the  general  ledger  showing,  with  re- 
gard to  the  stock  of  finished  goods,  the  receipts,  issue  and  balance 
on  hand  according  to  classes,  qualities,  sizes,  etc. 

Fire  Insurance.  fFire  insurance  is  a  contract  by  which  the 
insurer  undertakes,  in  consideration  of  the  premium,  to  in- 
demnify the  insured  against  loss  through  fire  to  a  specified  extent 
to  the  property  which  is  the  subject-matter  of  the  insurance. 

Firkin,     (fir.) 

Firm.  A  business  organization  owned  by  more  than  one 
investor. 

Fiscal  Year,  f  Any  yearly  period,  regardless  of  the  calendar 
year,  at  the  end  of  which  any  firm,  corporation  or  municipality 
may  close  its  books  in  order  to  determine  its  financial  condition. 

Fixed  Capital,  f  Capital  which  exists  in  a  fixed  or  perma- 
nent shape.  All  fixed  assets,  such  as  real  estate,  buildings, 
machinery,  etc.,  may  be  referred  to  as  fixed  capital. 

Fixed  Charges.  fThe  charges  upon  a  revenue  or  other  ac- 
count which  do  not  vary,  such  as  interest  on  bonds,  debentures, 
etc. 

Fixed  Property  Accounts.    Prin.  24. 

Fixtures.  The  attachments  to  real  property. in  the  nature  of 
furnishings,  as  shelves,  counters,  gas  and  electric  apparatus,  etc. 

Flat.  A  term  referring  to  a  price  of  commercial  paper  that 
does  not  take  into  account  accrued  dividends  or  interest,  some- 
times called  a  "lump  price." 

Floating  Capital.  fCapital  which  is  not  in  a  fixed  or  perma- 
nent shape,  but  is  available  or  convertible,  such  as  raw  material, 
book  debts,  cash,  etc. 

Floating  Charge.  tAn  expression  meaning  a  lien  or  charge 
on  the  general  assets  of  a  corporation,  generally  made  in  favor 
of  debenture  holders. 

Floating  Debt.  Miscellaneous  obligations  for  the  payment  of 
which  no  special  provision  or  fund  has  been  made.  The  floating 
debts  are  to  be  paid  out  of  the  current  incomes. 


210  DEFINITIONS 

Floating  Property.  The  commodities  or  material  owned  by 
the  business  for  consumption,  manufacture  or  sale.  The  items 
making  up  such  property,  since  they  are  constantly  undergoing 
change,  are  not  itemized  in  ledger  accounts,  but  are  ascertained 
from  time  to  time  by  inventory.     Form  13  E. 

Fluctuation.  The  rise  and  fall  in  values  incident  to  the  con- 
ditions of  commerce.  Fluctuation  downward  is  sometimes  con- 
fused with  depreciation,  which  is  a  very  different  matter. 

Folio,  (fol.)  A  page  in  an  account  book;  sometimes  two 
opposite  pages  having  the  same  number. 

Foot  or  Feet,     (ft.) 

Footing.     The  sum  of  a  column  of  figures.     See  Form  12  R. 

Foreclosure.  The  act  of  taking  legal  possession  of  property 
under  the  terms  of  a  mortgage. 

Forgery.  Any  unauthorized  alteration  of  a  commercial  paper 
or  document  which  affects  its  value  or  the  interests  of  those  who 
hold  it. 

Forwarded.     See  Forms  10  J  and  10  K. 

Fractions  of  a  Cent.  In  the  sets  of  the  American  Bookkeep- 
ing Series,  when  a  final  result  of  computations  on  bills,  notes,  etc., 
involves  a  fraction  of  a  cent,  one-half  or  greater  than  one-half, 
the  fraction  is  counted  as  an  additional  cent.  When  discount  in- 
volves a  similar  fraction,  it  is  counted  an  additional  cent  of  dis- 
count. Fractions  less  than  one-half  cent  are  disregarded  in  ex- 
tended amounts  and  final  results. 

Franchise.  A  valuable  privilege  granted  by  municipal  au- 
thority to  a  person,  firm  or  company,  to  be  used  in  carrying  on  a 
business.  The  right  of  street  car,  telephone,  light,  and  other  pub- 
lic service  corporation  to  use  the  streets  for  tracks,  poles,  wires, 
etc.,  is  secured  by  franchise  granted  by  municipal  or  state 
authority. 

Franchise  Account.    Prin.  28  C. 

Free  on  Board,  (f.  o.  b.)  Merchandise  sold  "f.  o.  b."  is  de- 
livered to  the  transportation  company  at  the  point  named  in  the 
terms  of  sale,  without  expense  to  the  buyer. 

Free  Surplus.  fThe  amount  which  is  available  for  further 
appropriation,  as  distinguished  from  the  amount  which  must  be 
held  available  to  meet  unincumbered  appropriations  and  con- 
tingent liabilities. 

Freight,  (frt.)  (1)  The  compensation  to  railroads  or  other 
carriers  for  transportation  of  goods.  (2)  The  goods  transported 
are  termed  freight. 

Freight  and  Express  Account.  yA  freight  and  express  ac- 
count is  designed  to  show  the  amount  paid  for  freight  on  goods 
bought,  called  "freight  in,"  and  on  goods  shipped,  called  "freight 
outward."  The  account  is  charged  with  all  express  and  freight 
charges,  and  is  credited  for  any  returns,  rebates,  or  for  any 
freight  paid  for  the  customer  in  advance,  which  he  has  to  pay  for. 
The  account  of  "freight  in"  is  closed  at  the  end  of  the  period  into 
the  manufacturing  account,  and  the  "freight  outward"  is  closed 
into  the  trading  account. 

Freight  Expense  Bill.     Form  24  C. 

Freight  Forwarded  Book.    Form  24  D. 


INDEX-COMMENTARY  211 

Freight-In.  fA  freight  and  express  account  designed  to  show 
the  amount  paid  for  freight  on  goods  bought,  called  "freight-in." 

Freight-Outward.  fThe  amount  paid  for  gooc^s  shipped  is 
called  "freight  outward." 

Freight  Received  Book.    Form  24  E. 

Fuel  Account.  fThe  fuel  account  is  kept  to  show  the  amount 
expended  to  produce  power  for  the  plants  and  machinery  needful 
in  the  production  of  goods.  The  account  is  charged  for  all  money 
so  expended,  and  is  finally  closed  into  manufacturing  account, 
since  it  is  a  part  of  the  cost  of  the  manufacture  of  goods. 

Funded  Debt.  fThat  portion  of  a  debt  which  is  represented 
by  a  bond  issue  and  payable  at  a^  distant  date. 

Fund.  (1)  Money  or  capital  set  aside  for  a  special  purpose. 
(2)  The  term  "funds"  often  means  ready  money.  Prin.  23  C  and 
25  A;  Form  IOC. 

Furniture.  The  movable  general  equipment  of  a  building  for 
the  use  of  the  persons  occupying,  e.  g.,  chairs,  desks,  carpets,  filing 
cabinets,  etc. 

Furniture  and  Fixtures  Account.    Prin.  24  B. 

Gallons,     (gal.) 

General  Accounts.  The  accounts  kept  in  the  general  ledger 
together  with  the  cash  account. 

General  CasfrBook,  or  main  cash  book.  The  book  containing 
the  important  records  of  cash  receipts  and  payments  as  opposed 
to  the  petty  cash  book,  in  which  the  small  or  insignificant  items 
are  entered. 

General  Expense.    Account  of,  Prin.  43  A ;  Form  12  T. 

General  Journal.    Prin.  73  D;  Form  12  A. 

General  Ledger.    Prin.  72  C. 

Goods.    Merchandise  or  commodities. 

Goods  in  Process,  f A  term  used  at  dates  of  inventory  in 
large  manufacturing  plants  and  establishments  showing  the  con- 
dition (by  technical  or  commercial  terms)  and  the  value  of  ma- 
terials as  ascertained  at  inventory. 

Goods  Returned.  fAn  account  to  which  are  charged  any 
sales  returned  by  reason  of  the  goods  being  damaged  or  unsatis- 
fying for  any  other  reason;  the  sum  of  the  balances  of  this  ac- 
count and  of  the  allowance  account,  plus  discounts,  being  the  de- 
ductions from  gross  sales  made  in  ascertaining  net  sales. 

Good  Will,  f  Whilst  good  will  is  a  general  term  capable  of  wide 
application  it  is  generally  used  in  accounting  to  represent  the 
balance  between  the  value  of  property  and  assets  acquired  by  a 
corporation  or  concern,  and  the  capital  stock  issued  against  such 
net  assets ;  sometimes  it  is  included  in  accounts  as  a  distinct  item 
calculated  on  a  specific  basis,  but  more  generally  it  is  used  in  a 
very  indefinite  way.  , 

Good  Will  Account.    Prin.  30. 

Gross,  (gr.)  The  entire  amount  or  bulk  before  deductions 
are  made.  Gross  earnings  are  earnings  before  expenses  are  taken 
out.  Gross  weight  is  weight  before  the  weight  of  case  or  con- 
tainer is  deducted. 


212  DEFINITIONS 

Gross  Profit,  fin  commercial  bookkeeping  the  difference  be- 
tween the  cost  of  goods  bought  or  manufactured  and  the  selling 
price  thereof. 

Gross  Trading  Profit.    Prin.  55. 

Group  Account,  f  An  account  corresponding  to  a  section  of 
the  statement  of  income  and  profit  and  loss  into  which  the  ac- 
counts corresponding  to  the  details  thereunder  are  transferred  in 
closing  the  books.  Examples:  income  from  sales,  cost  of  sales, 
selling  expense,  administrative  expense,  deductions  from  income, 
etc. 

Guaranty,  (guar.)  (1)  A  surety  for  the  performance  of  a 
contract  in  case  of  failure  by  the  contracting  party.  (2)  A  se- 
curity against  loss. 

Guard  Book,  f  A  term  used  in  English  and  Scotch  bookkeep- 
ing to  indicate  a  book  in  which  the  original  invoices  of  purchases, 
etc.,  are  kept  or  pasted. 

Guardian,  -f  One  legally  intrusted  with  the  care  of  the  per- 
son, and  management  of  property,  of  a  minor,  imbecile,  or  other 
person  incapable  of  managing  his  affairs.  Usually  appointed  by 
the  court,  but  may  sometimes  be  appointed  under  a  will. 

Guests'  Ledger.  fThe  ledger  in  which  are  kept  the  accounts 
with  the  guests  of  a  hotel. 

Half,     (hf.) 

Handkerchief.     ( hdkf . ) 

Hogshead,     (hhd.) 

Holding  Company.  'f  A  corporation  owning  the  stocks  of  other 
corporations  from  which  it  derives  its  principal  income  through 
dividends. 

Honor.  To  accept  or  to  pay  a  written  obligation  according  to 
its  terms. 

Hundred.     (C.) 

Hundred  Weight.     (Cwt.) 

Hypothecate.  To  subject  securities  to. legal  liability  for  the 
payment  of  a  debt  without  delivery  or  transfer  of  title.  See 
Collateral. 

Immaterial  Assets,  f A  generic  term  for  assets  not  material 
in  nature,  as  good  will,  rights  under  leases,  patents,  etc. 

Impairment  Account.  fAn  account  which  exhibits  the  net  in- 
solvency of  a  company,  i.  e.,  the  excess  of  its  liabilities,  including 
its  paid  up  capital,  over  its  assets.  , 

Impersonal  Accounts.  Accounts  which  represent  conditions 
and  record  the  profits,  losses,  receipts,  expenditures,  assets  and 
liabilities,  but  do  not  represent  relations  with  persons. 

Imprest  Fund,  f A  fund  impressed  or  earmarked  for  a  par- 
ticular purpose,  e.  g.,  petty  cash  fund,  which  is  periodically  re- 
imbursed for  the  exact  amount  expended  so  as  to  restore  the  fund 
to  its  original  amount.     See  Prin.  24  E. 

Income.  fThe  account  which  sets  forth  the  entire  income  for 
a  fixed  period,  whether  actually  received  or  not. 

The  gain  which  proceeds  from  property,  labor  or  business. 

The  remuneration  derived  from  skill  or  labor. 

The  proceeds  of  the  property  of  an  estate. 

Income  Accounts.     Prin.  52. 

Income  Tax.     Prin.  88  K. 


INDEX-COMMENTARY  213 

Income  and  Expenditure  Account.  fAn  income  and  expendi- 
ture account  (like  a  profit  and  loss  account)  states  the  entire  in- 
come for  the  period  to  which  it  relates  without  regard  to  whether 
the  same  has  been  collected  or  received  in  cash ;.  and  also  the  total 
expenses  properly  chargeable  against  said  income  without  regard 
to  whether  the  same  have  been  paid  or  are  still  owing,  and  there- 
fore takes  cognizance  of  outstanding  assets  or  liabilities  both  at 
the  commencement  and  close  of  said  period. 

Income  and  Expense  Account.    Prin.  59  C. 

Income  from  Property.    Prin.  24. 

Income  and  Profit.    Prin.  43. 

Indenture.     A  mutual  agreement  in  writing.     Form  16  A. 

Index.     Prin.  80  E;   Form  12  B. 

Index  Ledger,  f  A  ledger  arranged  alphabetically  with  index 
sheets  interspersed. 

Indirect  Labor,  f  Also  called  "unproductive  labor."  Labor 
which-  cannot  be  charged  directly  to  any  article  or  any  special 
classification  thereof. 

Individual  Deposits.  f( Banking).  Individual  deposits  would 
have  reference  to  all  deposits  other  than  by  banks  and  trust  com- 
panies, United  States  government,  or  from  the  banks'  agents.  It 
would  include  deposits  of  firms,  individuals,  corporations  in  gen- 
eral, private  bankers,  etc. 

Individual  Ledger.  |A  term  used  to  designate  a  customer's 
ledger. 

Indorsee.  fThe  party  indorsing  a  paper,  by  such  an  act,  must 
assign  or  transfer  certain  rights  therein  to  another  person  called 
the  "indorsee ;"  that  is,  the  person  to  whom  a  cheque,  note,  etc.,  is 
indorsed,  or  made  payable  by  assignment. 

Indorser.  f  A  person  who  indorses  a  cheque,  note,  etc. ;  that 
is,  writes  his  name  across  the  back  and  by  this  act  becomes  liable 
for  its  payment. 

Industrial  Processes.  Extraction,  transportation,  transforma- 
tion, trade,  service.    Wildman. 

Industrial  Securities,  'f  Securities  issued  by  manufacturing 
companies. 

Inheritance  Tax.  A  state  tax  imposed  upon  property  in- 
herited, not  a  tax  collectible  from  year  to  year  like  city  taxes,  but 
collectible  only  once— at  the  time  of  the  inheritance  of  the  prop- 
erty, and  payable  to  the  state  only. 

Insolvency.  Inability  to  meet  indebtedness.  A  business  is  in- 
solvent when  its  liabilities  exceed  its  assets. 

Installment.  One  of  the  parts  of  a  debt  payable  at  intervals. 
The  installment  system  of  selling  property  useful  to  families,  such 
as  books,  furniture,  homes,  etc.,  whereby  payment,  is  made  weekly 
or  monthly,  is  common. 

Installment  Book.  fAn  account  book  used  for  the  record  of 
installments  due  and  payable  on  stock  or  property. 

Installment  Certificate.     Form  18  H. 

Instant,     (inst.)     In  the  current  or  present  month. 

Insurance  Account.  fThe  insurance  account  is  designed  to 
show  the  amount  paid  to  a  company  or  companies,  representing 
a  premium,  or  premiums,  whereby  sueh  company  or  companies 
hold  themselves  responsible  for  any  pecuniary  loss  to  the  insured. 
Prin.  28  E. 


214  DEFINITIONS 

Insurance  Policy.  (Ins.  Pol.)  The  certificate  given  by  the 
insurance  company  to  the  assured,  obligating  the  company  to  re- 
imburse either  wholly  or  in  part  for  any  losses  occasioned  by 
fire,  water,  storm,  etc.,  as  specified  in  the  policy.    Form  16  I. 

Insurance  Report.     Form  16    K. 

Intangible  Asset  Accounts.    Prin.  28. 

Interest.  (Int.)  A  percentage  allowance  for  the  use  of 
money  or  its  equivalent  for  a  given  time,  usually  one  year. 

In  the  laboratory  units  of  the  A.  B.  S.,  interest  computations, 
except  bank  discount,  are  made  by  the  ordinary  interest  method ; 
that  is,  the  time  is  computed  in  months  (1/12  of  year)  and  days 
(1/30  of  month),  found  by  subtracting  the  earlier  from  the  later 
date,  unless  otherwise  specified  in  the  transactions. 

Interest  and  Discount  Accounts.    Prin.  59  A. 

Interest  Laws  and  Grace  on  Notes.  (Revised  1918.)  After 
the  states  named  ,there  follow,  first,  the  legal  rate  of  interest  in 
the  states;  second,  the  highest  rate  allowed  by  contract;  third,  in 
states  where  three  days  of  grace  are  allowed,  the  word  "grace" 
follows : 

Alabama,  8,  8;  Alaska,  8,  12,  grace;  Arizona,  6,  any;  Arkan- 
sas, 6,  10,  grace ;  California,  7,  any ;  Colorado,  8,  any ;  Connecti- 
cut, 6,  any ;  Delaware,  6,  6 ;  District  of  Columbia,  6,  6 ;  Florida,  8, 
10 ;  Georgia,  7,  8 ;  Idaho,  7,  18 ;  Illinois,  5,  7 ;  Indiana,  6,  8 ;  Iowa, 
6,  8;  Kansas,  6,  10;  Kentucky,  6,  6;  Louisiana,  5,  8;  Maine,  9, 
any;  Maryland,  6,  6;  Massachusetts,  6,  any;  Michigan,  5,  7;  Min- 
nesota, 6,  10;  Mississippi,  6,  10,  grace;  Missouri,  6,  8;  Montana, 
8,  any;  Nebraska,  7,  10;  Nevada,  7,  any;  New  Hampshire,  6,  6; 
New  Jersey,  6,  6 ;  New  Mexico,  6,  12,  grace ;  New  York,  6.  6 ;  North 
Carolina,  6,  6,  grace ;  North  Dakota,  7,  12 ;  Ohio,  6,  8 ;  Oklahoma, 
6,  10,  grace ;  Oregon,  6,  10 ;  Pennsylvania,  6,  any ;  Rhode  Island, 
6,  special  law;  South  Carolina,  7,  8,  grace;  South  Dakota,  7,  12, 
grace ;  Tennessee,  6,  6 ;  Texas,  6,  10,  grace ;  Utah,  8,  12 ;  Vermont, 
6,  6 ;  Virginia,  6.  6 ;  Washington,  6,  12 ;  West  Virginia,  6,  6 ;  Wis- 
consin, 6,  10;  Wyoming,  8,  12,  grace. 

Interior  Accounts.  fProprietary  and  economic  accounts  are 
interior  accounts. 

Intermediate  Ledger,  f A  ledger  used  for  the  purpose  of  re- 
cording those  sales  and  purchases  of  a  trader  which  are  of  almost 
daily  occurrence  with  the  same  person,  the  total  of  which  are 
posted  at  monthly  or  other  periods. 

Internal  Accounts,  f  The  accounts  which  represent  the  differ- 
ent pieces  of  property  and  difference  forces  at  work  within  the 
business  itself. 

Internal  Check.  fA  check  to  protect  against  error  which  may 
arise  where  the  record  of  accounts  is  such  that  the  entries  might 
balance  and  still  be  incomplete.     . 

Intestate.    Having  died  without  leaving  a  will. 

Inventory.     fThe  annual  account  of  stock  of  a  business. 

A  schedule  of  assets  or  property. 

An  itemized  list  of  goods  or  valuables  with  prices  attached. 

Inventory  Account.    Prin.  23  F. 

Inventories  Book.    Prin.  77. 

Invested  Funds.    Prin.  25. 

Investment.     (1)   The  appropriation  of  money  or  capital  for 


INDEX-COMMENTARY  215 

carrying  on  business,  with  a  view  to  profit  and  with  a  risk  of 
loss.  (2)  The  purchase  of  securities  with  a  view  to  profit  from 
their  income. 

Invoice.  (Inv.)  An  itemized  statement  of  goods  sold  show- 
ing prices,  terms  and  amounts.  The  invoice  is  delivered  to  the 
buyer  by  the  seller.     Prin.  62 ;  Form  15  O. 

Invoice  Book.     (I.  B. )     See  Prin.  76  C ;  Form  13  K. 

Jobber.  A  merchant  who  buys  goods  from  importers  and 
manufacturers,  and  sells  in  quantity  to  wholesale  and  retail 
merchants. 

Joint  Account,  f  A  record  of  the  transactions  of  some  particu- 
lar undertaking  where  two  or  more  parties  combine  in  contribut- 
ing the  necessary  capital  and  services  and  sharing  the  profits1  or 
losses  resulting  therefrom. 

Joint  Stock  Company.  A  partnership  with  the  capital  divided 
into  shares  held  by  the  partners.  The  powers  and  privileges  of  a 
joint  stock  company  are  defined  by  laws  differing  in  detail  in 
various  states. 

Journal  (J.)  fA  book  used  for  recording  such  transactions  as 
cannot  be  passed  through  other  records  of  original  entry,  and  for 
recording  all  transfers  from  one  account  to  another.     Prin.  8. 

Journalizing.    Prin.  71-71  G,  inclusive. 

Journal  Voucher.  tA  properly  approved  instrument  in  writ- 
ing authorizing  an  entry  on  a  book 'of  account. 

Judgment.  The  decision  of  a  court  supporting  a  claim  against 
a  debtor. 

Judgment  Note.  A  promissory  note  containing  a  special 
agreement  giving  the  payee  power  of  attorney  to  confess  judgment 
in  behalf  of  the  maker.  This  dispenses  with  necessity  of  suit  for 
collection,  and  permits  prompt  attachment  of  property  to  satisfy 
the  note  in  case  of  its  dishonor. 

Junior.     (Jr.) 

Labor  Account,  or  Wages.  fThis  account  shows  that  amount 
of  money  expended  in  manufacturing  as  remuneration  to  laborers 
for  converting  raw  material  into  salable  commodities.    Prin.  23  K. 

Labor  Hour,  f  A  basis  for  the  distribution  of  overhead.  As  a 
unit  it  consists  of  the  labor  of  one  operative  one  hour. 

Landlord.  The  owner  of  real  estate  which  is  leased  to 
tenants. 

Land  Buying.     Prin.  88  D. 

Lease.  A  contract,  in  writing,  granting  the  occupancy  of 
property  for  a  given  period  at  a  stated  compensation.    Form  16  C. 

Ledger  (L.)  fThe  principal  book  employed  in  the  system  of 
bookkeeping  by  double  entry,  wherein  all  the  transactions  recorded 
in  the  journal  and  subsidiary  aids  thereto  are  focused,  classified 
and  arranged  for  the  purpose  of  ready  reference.  Prin.  21  and  72. 

Legal  Aspects  of  Auditing.    Prin.  88-88  K. 

Legal  Assets.  fProperty  which  creditors  might  make  avail- 
able in  a  "Court  of  Law"  for  the  payment  of  the  debts  of  a  de- 
ceased person. 

Legal  Tender  Money.  Any  money  which,  by  law,  a  debtor 
may  require  his  creditor  to  receive  in  payment  unless  there  is  a 
contrary  stipulation  in  the  contract  or  obligation  itself. 


216  DEFINITIONS 

The  following  classes  of  United  States  money  are  a  legal  ten- 
der to  the  extent  specified : 

Gold  coins  for  all  debts  public  and  private  to  any  amount. 

Standard  silver  dollars,  for  all  debts  public  and  private  unless 
otherwise  stipulated  in  the  contract. 

Subsidiary  silver  coins  (coins  less  than  one  dollar),  for  all 
dues  public  or  private  in  sums  not  exceeding  ten  dollars. 

Minor  coins  (copper,  bronze,  or  nickel),  fer  any  amount  not 
exceeding  twenty-five  cents  in  one  payment. 

United  States  notes  or  "greenbacks,"  for  all  debts  public  and 
private,  except  duties  on  imports  (payable  to  the  government) 
and  interest  on  the  public  debt  (payable  by  the  government). 

Treasury  notes  of  1862  and  of  1890  are  also  legal  tender  to 
the  same  extent  as  greenbacks,  and  those  of  1890  are  receivable 
for  customs  and  other  public  dues. 

Lessee.  The  one  to  whom  a  lease  is  given,  or  who  takes  pos- 
session of  property  by  lease. 

Lessor.  The  one  who  gives  a  lease,  or  who  gives  possession 
by  lease. 

Letter  Book.     (L.  B.) 

Letter  of  Credit.  A  letter  issued  to  travelers  by  a  bank,  ad- 
dressed to  banks  in  foreign  cities,  directing  payment  of  funds  to 
the  holder. 

Liabilities.  fEmbrace  all  the  debts  or  obligations  due  by  a 
firm  to  its  creditors,  or 

The  debts  or  obligations  of  a  corporation,  partnership  or  in- 
dividual.    Prin.  15. 

Liability  Accounts.  Current,  Prin.  32;  long  term,  Prin.  33; 
contingent.  Prin.  34. 

Liability  Inventory  Account.    Prin.  32  F. 

Lien.  A  preferred  right  in  property  allowed  by  law, 
which  right  arises  from  some  service  in  connection  with  the 
property.  A  mechanic's  lien  is  the  right  of  a  mechanic  in  the 
building  he  has  helped  construct,  for  charges  or  expenses  pertain- 
ing to  it. 

Limited.  A  term  appearing  in  the  firm  title  indicating  that 
the  liability  of  stockholders  is,  by  agreement,  limited  to  a  certain 
amount,  usually  the  amount  of  their  investment. 

Liquid  Assets.  fCash  and  such  assets  as  can  instantly  be 
converted  into  cash. 

Liquidation.  The  act  of  determining  the  persons  and  amounts 
owed,  and  of  applying  assets  to  settlement. 

Liquidation  Account.  tAn  account  opened  when  a  concern  is 
being  wound  up  and  to  which  are  credited  all  the  profits  made  in 
realizing  the  assets,  and  debited  with  the  expenses  of  liquidation 
and  any  liabilities  which  may  have  to  be  paid,  but  which  are  not 
entered  in  the  books. 

List.    Prin.  18 ;  inventory  lists,  Prin.  18  B ;  Forms  4  F  to  4  H. 

Loan  and  Discount  Register.    Form  20  F. 

Loan  Account,  f  An  account  representing  money  invested  in 
loans. 

Loan  Capital.  fLoan  capital  is  the  capital  borrowed  upon 
issues  of  bonds,  secured  by  mortgages,  usually  on  real  estate, 
which  is  to  be  paid  at  some  future  time. 


INDEX-COMMENTARY  217 

Locating  Errors.    Prin.  83  CD. 

Long-Term  Indebtedness.    Prin.  33. 

Loose-Leaf  Ledger.    Prin.  80  G. 

Loss  and  Gain  Account.  The  same  as  Profit  and  Loss  account, 
and  preferred  by  some  for  the  reason  that  the  words  are  placed 
correspondingly  with  the  entries  in  the  account. 

The  contrary  order,  Profit  and  Loss,  is  generally  regarded  by 
accountants  as  more  logical,  inasmuch  as  profit  is  the  first  con- 
sideration, loss  being  treated  as  a  deduction  therefrom.  Compare 
with  Sales  less  cost  of  sales,  Income  less  expense,  etc. 

Losses.    Prin  .44. 

Machine  Hour.  fA  basis  for  the  distribution  of  overhead.  As 
a  unit  it  consists  of  the  work  of  one  machine  one  hour. 

Machine  or  Process  Cost,  f  A  method  of  charging  manufactur- 
ing costs  to  the  machine  or  process. 

Machinery  Account.    Prin.  24  C. 

Maintenance  Account.  tAn  account  or  series  of  accounts  rep- 
resenting cost  of  repairs,  renewals  and  replacements. 

Maker  of  a  Note.    The  one  who  signs  it. 

Manager.     (Mgr.) 

3Ian  Hour,  f  A  basis  for  the  distribution  of  manufacturing 
overhead.    As  a  unit  it  consists  of  the  work  of  one  man  one  hour. 

Manufactured  Goods  Account.    Prin.  23  I,  55  C. 

Manufacturing  Account,  f An  account  subsidiary  to  Profit 
and  Loss  account  for  the  purpose  of  showing  the  result  of  factory 
operations  separately  from  the  trading. 

Manufacturing  Business.  The  business  of  changing  raw  ma- 
terial into  merchandise,  or  goods  for  sale. 

Manufacturing  Cost.  The  material,  labor,  and  indirect  ex- 
pense cost  of  any  article ;  i.  •  e.,  all  outlays  necessary  to  manu- 
facture an  article. 

Manufacturing  Cost  System,  f A  system  subsidiary  to  but 
controlled  by  the  general  books  whereby  items  of  cost  and  expense 
are  grouped  around  units  of  production  and  service  which  are 
identified  by  groups  for  cost  purposes. 

Manufacturing  Profit.  fThe  excess  of  sales  over  the  prime 
cost  of  producing  the  goods  sold.     See  Prin.  43;  Form  6. 

Manufacturing  Supplies.  tMiscellaneous  supplies  to  be  con- 
sumed in  the  process  of  manufacture  which  are  either  too  small 
or  too  inexpensive  to  warrant  being  charged  to  stock. 

Material.  An  account  charged  with  the  cost  of  materials 
purchased  and  held  in  stock  for  manufacturing  purposes,  and 
credited  with  the  cost  of  such  material  as  is  delivered  from  stock 
to  the  factory  and  placed  in  process  of  manufacture.  Often  fur- 
ther subdivided  into  "raw"  material  and  "partly  finished"  material. 
Prin.  23  I. 

Material  in  Process,  f Product  in  an  uncompleted  state,  but 
differentiated  from  raw  material. 

Material  Requisition,  f A  form  used  for  registering  the  ma- 
terial taken  out  of  stores. 

An  order  for  material  to  be  placed  in  process. 

Materials  and  Supplies  Ledger,  f  A  subsidiary  ledger  con- 
trolled by  the  materials  and  supplies  account  in  the  general  ledger, 
showing,  with  regard  to  the  receipts  and  issues  of  the  various 


218  DEFINITIONS 

kinds  of  materials  and  supplies,  the  date,  number  of  units,  cost 
per  unit  and  money  value. 

Maturity.    The  date  on  which  a  debt  is  legally  collectible. 

Memorandum.     ( Mem. ) 

Memorandum  Accounts.    Prin.  58  A. 

Mercantile  Agency.  An  organization  to  gather  financial  in- 
formation about  business  houses  or  individuals,  and  sell  reports 
of  information  thus  gathered  to  interested  persons,  as  a  basis  for 
credit. 

Merchandise.  (Mdse.)  Goods  or  commodities  in  salable 
condition. 

Merchandise  Account.    Prin.  23  G-H. 

Merchandise  Inventory.  A  list  of  goods  kept  in  stock  for  sale. 
The  list  should  show  quantity,  cost  and  total  value.     Prin.  18  B. 

Merchandise  Purchase  Account.  fThis  account  should  be 
opened  to  show  the  entire  charges  for  all  merchandise  purchased, 
and  should  be  credited  for  all  merchandise  purchase  returns.  The 
balance  would  then  represent  the  net  amount  of  the  purchases  for 
the  period,  which  amount  should  be  carried  to  the  trading  ac- 
count.    See  Prin.  55  and  55  B ;  Form  12  R,  14  H. 

Merchandise  Sales  Account.  An  account  for  merchandise 
sales  and  adjustments  of  same.     Prin.  55-55  A. 

Merchandise  Trading  Account.    Prin.  55 ;  Form  12  S,  14  J. 

Misrepresentation  of  Business.    Prin.  85  E. 

Minute  Book.  |A  company  minute  book  is  for  the  purpose  of 
containing  the  minutes  of  the  meetings  of  the  shareholders  and  of 
directors. 

Mixed  Accounts.    Prin.  21. 

Money.  Money  consists  of  (1)  pieces  of  gold,  silver,  copper, 
etc.,  coined  and  issued  by  governmental  authority;  (2)  paper,  so 
issued,  which  may  be  legal  tender  instead  of  coin;  (3)  other 
paper,  lawfully  employed  in  payment  of  business  obligations.  See 
Legal  Tender. 

Mortgage.  (Mtg.)  A  document  of  conditional  transfer  of  the 
title  to  real  or  personal  property,  as  security  for  the  payment  of 
a  debt.  The  debtor  is  called  the  mortgagor;  the  creditor,  the 
mortgagee.     Form  16  B,  16  G. 

Mortgage  Loans.    Prin.  25  C. 

Municipal  Bond.  tAny  legally  authorized  bond  issued  by  vil- 
lage, township,  city,  or  any  territorial  subdivision  of  the  same,  the- 
payrnent  of  which  must  be  accomplished  through  the  collection  of 
taxes,  assessed  upon  the  property  embraced  in  the  division  or  sub- 
division issuing  the  bond. 

Negative  Account.  fAn  account  which  reduces  the  value  of 
another  account,  e.  g.,  returns  is  a  negative  to  sales. 

Negotiable  Paper.  A  check,  note,  draft,  or  other  paper  trans- 
ferable from  one  holder  to  another  who  may  enforce  payment 
without  reference  to  equities  existing  between  the  first  parties. 
See  Prin.  88  E. 

Net.    Not  subject  to  further  deduction,  as  net  price,  net  profit. 

Net  Capital.  fThe  surplus  of  actual  assets  over  actual  liabili- 
ties . 

Net  Earnings.  fThe  earnings  from  the  operation  of  a  busi- 
ness after  deducting  only  the  expenses  incidental  to  the  conduct 
thereof. 


INDEX-COMMENTARY  219 

Net  Income,  f After  all  costs  of  operating  and  fixed  charges 
of  every  kind  have  been  deducted  from  the  earnings  of  a  corpora- 
tion, the  balance,  which  is  the  amount  available  for  dividends, 
may  be  called  "net  income." 

Net  Investment.  fThe  difference  between  the  total  sum  in- 
vested and  the  total  withdrawals. 

Net  Invoice.  The  sum  of  the  invoice  after  discounts  are  de- 
ducted. 

In  the  laboratory  units  of  the  A.  B.  S.,  one-half  or  major 
fraction  of  a  cent  belonging  to  a  discount  is  considered  an  addi- 
tional cent  discount. 

Net  Profits.  fThe  balance  remaining  after  all  expenses  of  dis- 
tribution and  establishment  charges,  discount,  interest,  etc.,  have 
been  deducted  from  profits. 

The  balance  of  the  Profit  and  Loss  account  when  the  same  is 
a  gain. 

The  surplus  remaining  over  from  /the  employment  of  capital 
after  defraying  all  the  necessary  expenses  and  outlay  incurred  in 
its  employment,  and  after  the  capital  has  been  replaced  or  pro- 
vision made  for  its  replacement.     See  Prin.  43 ;  Form  7D,  8  E. 

Net  Trading  Profit.     Prin.  46. 

Net  Worth.  The  excess  of  assets  over  liabilities  of  a  given 
person  or  concern.     Prin.  17. 

Nominal  Accounts,  f  Accounts  which  represent  income  or  ex- 
penditures. Accounts  used  for  the  purpose  of  classifying  income 
and  expenditure  under  such  heads  as  rent,  taxes,  discounts,  sales, 
purchases,  etc.,  and  form  the  material  for  the  construction  of  the 
Profit  and  Loss  account.     See  Prin.  51-60. 

Nominal  Capital.  fThe  amount  of  capital  for  and  in  respect 
of  which  a  company,  having  its  capital  divided  into  shares,  is 
registered. 

Nominal  Ledger,  f  A  ledger  used  for  separately  recording  the 
transactions  in  connection  with  the  various  nominal  accounts. 

Notary  Public.  (N.  P.)  A  state  officer,  generally  appointed 
by  the  governor  for  a  term  of  years,  principally  to  take  acknowl- 
edgment of  instruments,  to  make  demand  for  payment  of  com- 
mercial paper,  and  to  protest  for  non-payment,  and  to  administer 
oaths.     See  Acknowledgment. 

Note.     Form  151,  15  S.  > 

Note  Book.     (N.  B.)     See  Form  13  M  and  17  Q. 

Notes  Payable.  fAll  written  agreements  in  every  form  which 
a  person  has  entered  into,  and  which  are  held  by  others,  and 
which  bind  such  a  person  to  pay  sums  of  money  at  some  future 
time  either  on  demand  or  a  fixed  date. 

The  account  title,  Notes  Payable,  is  more  frequently  employed 
at  the  present  time  than  the  title  "Bills  Payable,"  which  was  for- 
merly in  universal  use. 

Notes  Receivable  Account.    Prin.  23  E ;  Form  11  C. 

Notes  Receivable  Discounted.    Prin.  34. 

Number.     (No.),  also  (#),  when  placed  before  the  figures. 

One  Page  Cash  Book.    Form  10A-10B-11A. 

Operating  Departments.  Divisions  of  a  manufacturing  busi- 
ness, such  as  pattern  rooms,  foundry,  machine  shop,  etc.  Form 
27  A. 


220  DEFINITIONS 

Open  Account.  (1)  The  ledger  account  with  a  creditor  or 
debtor  in  which  the  current  charges  and  credits  are  entered.  (2) 
Any  account  not  periodically  balanced. 

Open  Policy.  A  policy  of  insurance  covering  risks  that  are 
undetermined  at  the  time  of  issue,  but  that  may  be  entered  on 
the  policy  later. 

Order  Book.    Form  14  C. 

Order  of  Accounts  in  a  Ledger.    Prln.  21. 

Order  Sheet.    Form  14  B,  15  N. 

Ordinary  Interest  Method.    See  Interest. 

Organization.  Different  forces  brought  into  corresponding  re- 
lation to  accomplish  a  given  end.  A  business  organization  is  the 
sum  of  its  combined  management  and  capital  brought  together  to 
effect  a  business  purpose. 

Organization  Expenses.    Prin.  28  G. 

Original  Entries.    Prin.  71-71  H. 

Outlawed  Claim.  A  claim  against  a  debtor  who  may  avoid 
it  in  law  on  account  of  the  time  it  has  remained  uncollected. 
"Statutes  of  Limitation"  prescribe  the  time  within  which  suit  may 
be  begun.    The  time  varies  in  different  states. 

Outstanding.     Referring  to  liabilities  unpaid. 

Overhead  Expense.    Prin.  54  G.     (See  Burden.) 

Packages,     (pkg.) 

Paid,     (pd.) 

Paid-Up  Capital.  The  actual  amount  which  has  been  paid  up 
or  is  legally  considered  as  paid  up,  in  respect  of  the  capital. 

Pails,     (pi.) 

Pair,     (pr.) 

Par.  Equality  between  nominal  and  commercial  value. 
Stocks,  bonds,  drafts,  etc.,  are  above  par  when  they  sell  at  more 
than  face,  and  below  par,  when  at  less  than  face. 

Part,     (pt.) 

Partnership.  An  association  of  persons  who  unite  property 
or  services  in  business.    Prin.  88  G. 

Party.  One  of  the  participators  in  a  transaction  or  exchange 
of  values.  An  individual,  partnership  or  corporation  may  be  a 
"party"  to  a  transaction. 

Pass  Book.  A  customer's  book  in  which,  on  presentation,  a 
trader  or  banker  enters  current  charges  or  credits.    Form  15  G. 

Patent.  A  document  issued  by  the  government,  securing  to 
an  inventor  the  exclusive  right  to  manufacture  and  sell  his  in- 
vention for  a  given  period  of  time  (fourteen  years  in  the  United 
States). 

Patent  Rights  Account.    Prin.  28  A. 

Pawn.  To  transfer  possession  of  personal  property  as  se- 
curity for  the  re-payment  of  money,  delivered  to  the  owner  by  the 
pawnbroker. 

Pawnbroker.  A  money  lender  whose  loans  are  secured  by  the 
borrower  pledging  or  "pawning"  personal  property  as  security,  the 
pledge  being  on  condition  of  forfeiture  of  ownership  in  the  prop- 
erty if  payment  is  not  made  according  to  the  agreed  terms. 


INDEX-COMMENTARY  221 

Payee.  The  person  named  in  commercial  paper  to  receive 
payment. 

Per  Centum.     (%) 

Permanent  Assets,  f  Comprise  such  investments  as  are  neces- 
sary to  conduct  the  business,  and  must  be  kept  in  a  state  of  ef- 
ficiency in  order  to  carry  on  the  business. 

Person.  This  term  is  used  in  a  business  sense  to  include 
either  an  individual,  firm,  association,  or  corporation. 

Personal  Account.  Of  customer,  Form  12  H,  13  I ;  of  creditor, 
Form  12  G,  13  H. 

Personal  Property.  Chattels,  merchandise,  commodities  and 
material,  as  opposed  to  real  property. 

Personal  Property.  All  movable  property ;  horses,  tools,  fur- 
niture, "chattels"  of  all  kinds  (crops  of  annual  planting,  such  as 
potatoes,  are  usually  treated  as  "personal  property,"  but  would 
pass  with  the  sale  of  the  land  if  growing  thereon),  securities,  etc., 
as  distinguished  from  "real  property." 

Petty  Cash  Book.    Form  13  O. 

Petty  Expense  Book.     (P.  E.  B.)     Prin.  74  E;  Form  13  0. 

Petty  Ledger,  f  A  ledger  in  which  sundry  accounts  or  ac- 
counts with  customers  who  are  not  expected  to  be  regular  pur 
chasers  are  kept. 

Pieces,     (ps.) 

Plain  Bond.  fA  bond  not  secured  by  mortgage;  practically 
the  same  thing  as  a  "debenture  bond"  or  a  "certificate  of  indebted- 
ness."   It  would  not  be  supposed  to  have  a  "sinking  fund." 

Planning  of  Accounts.  fArranging  the  accounts  in  the  gen- 
eral ledger  in  the  order  in  which  it  is  expected  they  will  appear 
in  the  financial  statements. 

Plant,  f  A  title  used  to  designate  permanent  assets,  such  as 
buildings,  machinery,  etc.,  required  for  purposes  of  manufacture. 

Posting.  The  process  of  transferring  charges  and  credits 
from  first  entries  to  ledger  accounts.     Prin.  71  H. 

Postponed  Creditors,  t Creditors  who  are  disentitled  to  rank 
against  an  estate  or  property  until  all  other  creditors  for  valuable 
consideration  in  money  or  money's  worth  have  been  satisfied. 

Pound,     (lb.),  also  (#)  when  placed  after  the  figures. 

Power  of  Attorney.  The  power  given  by  one  person  to  an- 
other, authorizing  the  latter  to  make  specified  contracts  in  the 
name  of  the  former. 

Preferential  Creditors.  fCreditors  whose  debts  are  directed 
to  be  paid  in  priority  to  the  claims  of  others  in  the  administra- 
tion of  the  estates  of  (a)  A  debtor  in  bankruptcy,  (b)  A  deceased 
insolvent,     (c)  A  company  being  wound  up. 

Preferred  Stock.  (Pref.  Stock.)  The  stock  of  a  corporation 
which  is  entitled  to  dividends  before,  or  regardless  of,  the  common 
stock.  > 

Preliminary  Expenses.  fThe  expenditure  in  connection  with 
the  promotion,  formation,  establishment  and  registration  of  a 
company. 

Premium.  (1)  The  amount  above  par  paid  for  commercial 
paper.     (2)  The  amount  paid  for  insurance. 

President.     (Pres.) 


222  DEFINITIONS 

Primary  Income.  fThat  income  which  is  derived  from  the 
principal  business  in  which  the  organization  is  engaged.    Prin.  43. 

Primary  Records.  Forms,  such  as  receipt  stubs,  invoice  dupli- 
cates, and  many  others  used  to  record  transactions.    Wildman. 

Prime  Cost,  f  The  original  or  direct  cost  of  an  article  as  dis- 
tinct from  the  "cost  of  production."  The  latter  term  includes  all 
expenditures  incurred  in  manufacture,  whether  direct  or  indirect. 

Principal.  (1)  The  person  employing  an  agent.  (2)  The  sum 
upon  which  interest  is  computed. 

Principal  Books.  Books  from  which  or  to  which  accounts  are 
posted,  or  in  which  accounts  are  entered. 

Private  Ledger  f  A  ledger  reserved  for  the  use  and  inspection 
of  the  partners  or  other  proprietors  of  a  business,  and  usually  con- 
taining particulars  as  to  the  capital  in  the  business,  the  profit  and 
loss  account,  and  other  private  matters.  (Note. — Successive  bal- 
ance sheets  are  almost  invariably  entered  therein,  in  the  form  of  a 
memorandum. ) 

Processes  of  Bookkeeping.    Recapit,  Prin.  1-10. 

Producer.  One  who  grows,  buys,  manufactures,  or  otherwise 
prepares  a  utility  for  sale.  Farmers,  manufacturers,  merchants, 
bankers,  and  professional  people  are  producers. 

Production  Equipment,  t  Equipment  necessary  to  produce 
some  manufacture  or  utility,  especially  with  public  service  cor- 
porations for  production  of  electricity,  gas  or  power. 

Production  Order.  fAn  order  to  the  factory  to  produce  a  cer- 
tain quantity  of  goods. 

Profit.  fProfit  consists  of  the  surplus  remaining  over  from 
the  employment  of  capital  after  defraying  all  the  necessary  ex- 
penses and  outlay  incurred  in  its  employment,  and  after  the  capi- 
tal has  been  replaced  or  provision  made  for  its  replacement. 
Prin.  41  B. 

Profit  and  Loss  Account.  (P.  &L.)  Recapitulation,  Prin. 
51-60 ;  Form  10  O,  12  Y,  14  L. 

Profit  and  Loss  Statement.    Prin.  41  to  50. 

Profits  and  Losses,  Miscellaneous.    Prin.  59  D. 

Promissory  Note.    Prin.  65 ;  Form  15  S. 

Proof  of  Fire  Loss.    Form  16  J. 

Proof  Sheet.    Prin.  72  L;  Form  121. 

Property.  Things  that  a  person  may  own  or  dispose  of, 
whether  material  or  immaterial. 

Property  Accounts.    Prin.  22-30;  Form  HE. 

Proprietorship.  f(l)  The  excess  of  assets  over  liabilities. 
(2)  That  portion  of  the  assets  of  a  business  organization  which 
is  assigned  to  the  proprietor  as  his  equity. 

Protest.  A  formal  act  of  a  notary  public  declaring  certain 
paper  dishonored  by  the  payers,  and  holding  the  parties  to  the 
paper  liable.    Prin.  65 ;  Form  16  L-N. 

Proximo,     (prox.)     In  the  next  following  month. 

Public  Service  Corporations.  fCorporations  existing  to  sup- 
ply some  service  or  utility  indispensable  to  the  general  public,  such 
as  transportation,  gas,  light,  water  power,  etc. 

Purchase  of  Land.    Prin.  88  D. 


INDEX-COMMENTARY  223 

Purchases  Account.    Prin.  55-55  B. 

Purchases  Book  (P.  B.),  and  Records.    Prin.  76  to  76  C. 

Quick,  or  Current,  Assets,  f  Anything  that  can  be  readily  con- 
verted into  cash  without  the  necessity  of  taking  a  prohibitive  loss. 
See  Prin.  13. 

Quick  Assets.  f  Anything  that  can  be  readily  converted  into 
cash  without  the  necessity  of  taking  a  prohibitive  loss.  See 
Prin.  25. 

Quotations.  The  published  price  of  merchandise  or  commodi- 
ties, freight  or  exchange  rates,  etc. 

Railway.     (Ry.) 

Rating.  The  report  of  a  commercial  agency  on  the  financial 
standing  and  credit  of  a  person  or  concern. 

Reading  Amounts.    Prin.  71 1. 

Real  Estate  Account.    Prin.  24 A;  Form  HE. 

Real  Account,  f  Represents  the  values  of  actual  assets,  or  the 
amount  of  actual  liabilities,  such  as  real  estate,  machinery,  loans 
and  mortgages.     See  Prin.  21 ;  Form  11  B,  11  E. 

Real  Estate.  Property  in  houses,  lands,  and  attachments 
legally  pertaining  thereto. 

Real  Estate  Account.    Prin.  24  A;  Form  11  E. 

Real  Property.  fLand  and  buildings,  including  everything, 
such  as  minerals,  etc.,  below  the  surface,  and  the  air  or  space 
above ;  also  all  crops,  as  grass,,  trees,  etc.,  which  are  not  consid- 
ered as  of  annual  planting. 

Rebate.    A  deduction  from  an  amount  assumed  to  be  due. 

Recapitulation  Statement.  A  statement  presenting  titles  and 
totals  of  other  statements  without  the  details  contained  in  he 
latter. 

Receipt.  (Rect.)  A  written  acknowledgment  of  money  or 
value  received  from  another.     Form  15  R. 

Receiver.  One  appointed  by  a  court  to  hold  in  trust,  or  man- 
age, disputed  or  unsettled  property  or  claims. 

Reconciliation  of  Bank  Statement.    Prin.  84  B. 

Redemption  Fund,  f  A  sinking  fund  established  for  the  pay- 
ment of  redeemable  debentures,  funded  debt,  or  other  obligation. 
An  amount  set  aside  at  regular  intervals  from  profits  which  will 
be  sufficient  to  discharge  an  obligation  at  maturity.  A  reserve 
fund. 

A  fund  accumulated  to  redeem  outstanding  obligations  at  the 
end  of  a  certain  time. 

Refund.  A  repayment,  as  when  a  merchant  returns  money 
to  a  customer  whom  he  has  overcharged. 

Relation  of  Statement  of  Condition  to  Books.    Prin.  19. 

Relation  of  Statement  of  P.  &  L.  to  Books.    Prin.  49. 

Remittance  Register.     Form  20  G. 

Rent.  Money  or  goods  transferable  from  tenant  to  landlord 
in  payment  for  use  of  property. 

Repair  and  Renewal  Account.  A  repair  and  renewal  account 
is  an  account  kept  to  show  the  amount  of  expenditures  made  from 
time  to  time  for  repairing  and  renewing  plants  and  machinery  to 
keep  them  in  a  state  of  working  capacity,  and  the  balance  at  the 
end  of  the  period  is  closed  into  the  profit  and  loss  account. 

Reserve  Fund.    An  amount  deducted    from    profits  and  re- 


224  DEFINITIONS 

tained  in  the  business  to  provide  an  offset  against  real  or  contem- 
plated losses.  This  amount  retained  is  an  asset,  although  it  may 
be  represented  by  no  distinctive  asset  account,  but  may  remain 
undistinguished  among  the  other  assets  of  the  business.  It  may 
be  actually  withdrawn  from  the  other  assets  and  placed  in  a  sep- 
arate bank  account,  in  which  case  a  corresponding  asset  account 
would  be  opened  in  the  ledger. 

Whether  left  undistinguished  among  other  assets,  or  actually 
set  apart,  the  amount  of  the  fund  is  credited  in  the  ledger  to  a 
Reserve  account  which  balances  the  fund  in  like  manner  as  the 
Capital  account  balances  the  net  sum  of  the  other  assets. 

Reserve  Accounts.  Prin.  35 ;  for  depreciation,  Prin.  24,  35  A ; 
for  doubtful  accounts,  Prin.  35  B. 

Resources.    Prin.  13. 

Returned  Purchases  Account.  An  account  subsidiary  to 
Trading,  in  which  goods  returned  to  the  persons  from  whom  pur- 
chased, are  credited. 

Returned  Sales  Account.  An  account  subsidiary  to  Trading, 
in  which  goods  received  back  from  customers,  are  debited. 

Revenue  Account,  f  A  term  sometimes  used  to  designate 
Profit  and  Loss  account.  "Revenue  accounts"  are  the  accounts  that 
relate  to  profits  and  losses,  income  and  expenditures,  as  distin- 
guished from  capital  accounts  which  relate  to  assets  and  liabili- 
ties.— Am.  Enc. 

Route.  (1)  The  railroad  or  carrier  to  which  shipments  are 
intrusted.  (2)  To  route  a  shipment  is  to  designate  carriers  and 
the  points  where  interline  shipments  are  transferred  from  one 
carrier  to  another.  (3)  To  route  a  job  through  a  factory  is  to 
itemize,  in  their  order,  the  various  materials  and  operations  from 
start  to  finish. 

Rule  for  Debit  and  Credit.    Prin.  72-72  H. 

Ruling.    Prin.  71 H. 

Sale  Contract.    Prin.  66;  Form  16  D. 

Sale  of  Goods.    Prin.  88  B. 

Sales  Account.    Prin.  55  A. 

Sales  Book  (S.  B.)  and  Sales  Records.    Prin.  75-78. 

Sales  Discount  Account.  An  account  charged  for  the  cash 
discounts  allowed  on  invoices  sold. 

Sales  Ledger.  fThe  sales  ledger  contains  accounts  with  the 
concern's  debtors. 

Sales  Records.    Prin.  75  to  75  E. 

Savings  Fund  Account.    Form  10  C. 

Scale  Ticket.    Form  14  A. 

Schedule.    Prin.  18 ;  Forms  4  F,  4  G,  4  H. 

Seal.  The  impression  or  mark  on  a  document  made  by  the 
signer,  additional  to  his  signature,  as  evidence  of  his  deliberate 
authorization  of  its  terms. 

Among  the  Saxons  and  other  early  people,  who  generally 
could  not  write,  legal  instruments  required  a  seal  instead  of  sig- 
nature. The  requirement  of  a  seal  on  certain  instruments  became 
a  matter  of  law,  and  so  continued.  The  word  "seal"  or  "L.  S."  in- 
closed in  a  circle,  or  in  brackets,  is  frequently  used  on  documents, 
and  constitutes  a  seal. 


INDEX-COMMENTARY  225 

Secondary  Income.  fThat  income  which  is  derived  from  oper- 
ations not  comprehended  by  the  principal  business  in  which  the 
organization  is  engaged.     Prin.  43  and  59. 

Secret  Reserve.    Prin.  84. 

Securities.  fAll  forms  of  investments;  stocks,  bonds,  mort- 
gages, etc.,  of  every  kind ;  the  written  or  printed  papers  that  rep- 
sent  the  ownersliip  of  corporations,  or  the  lender's  evidence  of  the 
borrower's  indebtedness. 

Selling  Expense.    Prin.  43  A. 

Service  Business.  A  business  that  sells  principally  services 
rather  than  commodities;  as  a  dray  line,  railroad,  hotel,  light, 
heat  and  power  company,  etc. 

Shares  of  Stock.    Prin.  39  B ;  Form  15  W. 

Shipment.     (Shipt.)     The  goods  shipped. 

Shop  Account.  A  controlling  account  in  the  general  ledger  to 
show  the  aggregate  of  material,  labor,  and  expenses  chargeable 
to  the  product  of  the  shop. 

Shop  Cost.  fCost  of  manufactured  article  up  to  point  of 
leaving  the  shop.  (This  is  not  to  be  confused  with  "factory  ex- 
pense," "overhead"  or  "factory  burden.") 

Short  Extend.  To  enter  or  carry  an  amount  short  of,  or  be- 
fore, the  money  column. 

Shrinkage.    Prin.  58  A. 

Sight  Draft.     (S.  D.) 

Signature.    Prin.  62;  Form  15  A. 

Silent  Partner.  A  business  partner  who  is  not  actively  en- 
gaged in  the  business,  but  whose  investment  entitles  him  to  share 
in  profits. 

Sinking  Fund.  Money  set  apart,  in  savings  or  investment,  to 
meet  a  future  maturing  debt.    Prin.  25  A. 

Single  Entry.  A  system  of  bookkeeping  wherein  entries  of 
transactions  do  not  require  equal  charges  and  credits  for  every 
exchange.     Prin.  70;  Forms  17A-L. 

Single  Entry  Changed  to  Double  Entry.  Prin.  89  F;  Form 
17  M. 

Sole  Proprietorship.  1  f  A  business  organization  in  which  the 
proprietorship  is  vested  in  an  individual. 

Solvency.  Ability  to  meet  obligations.  A  business  is  solvent 
when  it  has  assets  sufficient  to  meet  its  liabilities. 

Space  for  Ledger  Accounts.    Prin.  801. 

Special  Books.    Prin.  78. 

Special  Column  Cash  Book.  Prin.  74  H;  Forms  18  C,  24  F, 
25  B. 

Special  Journal.     Prin.  73  E  ;  Forms  17  M,  22  D,  23  I. 

Speculation.  Purchase  of  land,  goods  or  securities,  with  a 
view  to  selling  them  at  a  rise  in  market  price,  as  distinguished 
from  trading,  wherein  goods  are  bought  to  supply  regular  retail  or 
wholesale  demands.  * 

Speculative  Accounts.    Prin.  27. 

Standard  Account  System.    Prin.  5. 


226  DEFINITIONS 

Statement.  (1)  A  written  exhibit  of  the  condition  or  statis- 
tics of  a  business  organization.  Prin.  10.  (2)  A  written  exhibit 
of  the  doings  of  an  agent.  (3)  A  written  exhibit  of  the  current 
dealings  between  persons. 

Statement  of  sales,  Form  15  Q ;  of  account  Form  15  P ;  of 
depositor,  Form  15  G ;  of  financial  condition,  Forms  1,  2,  3,  4,  5, 

12  M ;  of  profit  and  loss,  Forms  6,  7,  7  D,  8,  9,  12  N ;  trading,  Form 

13  J;  departmental,  Forms  18  M,  18  N,  ISO. 

Statement  of  Account.  fA  written  or  typewritten  memoran- 
dum, showing  the  balance  due  from  debtor  with  items  making  up 
same.    Customarily  mailed  monthly  to  debtors. 

Statement  of  Affairs,  f A  statement  of  affairs  is  an  exhibit 
of  the  assets  and  the  liabilities  of  an  insolvent  debtor,  so  arranged 
as  to  show  on  one  side  all  the  assets  of  the  concern  with  the 
amounts  they  are  expected  to  real&e  extended  to  another  column, 
and  on  the  other  side  all  the  concern^  gross  liabilities  with  the 
amount  expected  to  rank  carried  into  a  separate  column. 

Statement  of  Assets  and  Liabilities.    Prin.  12. 

Statement  of  Balances.  A  trial  balance  of  ledger  accounts 
which  is  proved  to  be  correct. 

Statement  of  Income  and  Profit  and  Loss.  fA  statement 
which  sets  forth  the  financial  operations  of  a  business  organiza- 
tion, for  a  given  period,  comprehensively  grouped  about  the  divi- 
sions of  organization  and  connecting  the  financial  condition  of  the, 
organization  at  the  end  of  the  period  with  that  at  the  end  of  the 
next  preceding  period.     Prin.  41-42. 

Statement  of  Realization  and  Liquidation,  f  A  financial  state- 
ment which  shows  in  parallel  columns,  respectively,  concerning 
the  assets  and  liabilities  arranged  in  report  form,  the  amount  per 
the  books ;  the  amounts  unrealized ;  the  amounts  to  be  accounted 
for ;  the  loss  and  gain  incident  to*  realization  and  liquidation ;  the 
assets  realized;  the  liabilities  liquidated;  the  cash  resulting  and 
to  be  turned  over. 

Statement  of  Receipts  and  Disbursements,  f  A  statement  ar- 
ranged in  report  form  showing  respectively  with  regard  to  cash, 
the  balance  at  the  beginning  of  a  period,  the  classified  receipts 
and  disbursements  during  the  period  and  the  balance  remaining  at 
the  end  of  the  period. 

Statement  of  Receipts  and  Payments,  f  A  statement  of  re- 
ceipts and  payments  is  a  summarized  cash  account  and  states  the 
amounts  of  money  actually  received  and  disbursed  during  the 
period  to  which  it  relates  without  regard  to  whether  the  same  are 
earnings  or  expenses  exclusively  appertaining  to  that  period  or 
include  items  so  appertaining  to  the  period  preceding.  It  starts 
with  the  cash  balance  at  the  commencement  of  the  period  which 
it  covers,  and  concludes  with  the  cash  balance  at  the  close  thereof. 

Statistical  Account.  tAn  account  kept  for  the  purpose  of  ex- 
hibiting certain  statistical  results  pertaining  to  the  financial  trans- 
actions of  an  organization,  but  not  necessarily  a  part  of  the  regu- 
lar classification  of  accounts. 


INDEX-COMMENTARY 


227 


Statutes  of  Limitation   (Revised  to  1918).    Accounts,  notes, 

contracts,  and  domestic  judgments  become  outlawed  by  statute  in 

the  several  states  at  expiration  of  the  time  shown  in  the  follow- 
ing table : 

Judgments 

State                      Open  Unsealed  Sealed  Courts  not                Courts 

Accounts  Notes  Contracts  Contracts  of  Record                of  Record 

Ala 3  yrs.  6  yrs.  6  yrs.  10  yrs.  6  yrs.  20  yrs. 

Ariz 3  "  4  "  4  "  4  "  5     "            5     " 

Ark 3  "  5  "  3  "  5  "  10    "  10    " 

Calif 4  "  2  "  2  "  5  "  5    "            5    " 

Colo 6  "  6  "  6  "  6  "  6    "  20    " 

Conn 6  "  6  "  16  "  17  "  No  limit   No  limit 

Del 3  "  6  "  3  "  20  "  5  yrs.  10  yrs. 

D.  C 3  "  3  "  3  "  12  "  12     "  12     " 

Fla 3  "  5  "  5  "  20  "  20     " 

Ga 4  "  6  "  6  "  20  "  7    " 

Idaho    ...4  "  5  "  5  "  5  "  6  yrs.          6  yrs. 

Ill 5  "  10  "  5  "  10  "  10    "  20    ** 

Ind 6  "  10  "  6  "  10  "  20    " 

Iowa    ....5  "  10  "  5  "  10  "  10 yrs.  20    " 

Kans.    ...3  "  5  "  3  "  5  " 

Ky 5  "  15  "  5  "  15  "  15     "  15     " 

La 3  "  5  "  5  "  10  "  10     "  10     " 

Maine    ...6  "  6  "  6  "  20  "  6    "  20    " 

Md 3  "  3  "  3  "  12  "  12     "  12     " 

Mass 6  "  6  "  6  "  20  "  20    "  20." 

Mich 6  "  6  "  6  "  10  "  6     "  10     " 

Minn.     ...6  "  6  "  6  "  6  "  10     "  10     " 

Miss 3  "  6  "  6  "  6  "  7     "            7     " 

Mo 5  "  10  "  5  "  10  "  10     "  10     " 

Mont 5  "  8  "  8  "  8  "  5    "  10    " 

Nebr 4  "  5  "  5  "  5  " 

Nev 4  "  6  "  4  "  6  "  6    " 

N.  H 6  "  6  "  6  "  20  "  20    " 

N.  J 6  "  6  "  6  "  16  "  20     " 

N.    Mex...4  "  6  "  4  "  6  " 

N.  Y 6  "    '       6  "  6  "  20  "  6     "  20     " 

N.  Car.   ..3  "  3  "  3  "  10  "  7     "  10    " 

N.    Dak... 6  "  6  "  6  "  10  "  10    "  10    " 

Ohio    .....6  "  15  "  6  "  15  " 

Okla 3  "  5  "  3  "  5  " 

Ore 6  "  6  "  6  "  10  "  10    " 

Penn 6  "  6  "  6  "  20  "  20    " 

R.   1 6  "  6  "  6  "  20  "  20     "  20     " 

S.  Car.    ..6  "  6  "  '  6  "  20  "  20    "  20    " 

S.  Dak.   ..6  "  6  "  6  "    '  20  "  20    "  20    " 

Tenn 6  "  6  "  6  "  6  "  10    "  10    " 

Tex 2  "  4  "  4  "  4  "  10     "  10     " 

Utah    ...A  "  6  "  6  "  6  "  8    "            8    " 

Vermont    .6  "  6  "  6  "  8-15  6    "            8    " 

Va 3  "  5  "  5  "  10  "  10    "  10    " 

Wash.    ...3  "  6  "  7  "  6  "  6    "            6    " 

W.  Va.    ..5  "  10  "  10  "  10  "  10    "  10    " 

Wis 6  "  6  "  6  "  10  "  6    "  20    " 

Wyo 8  "  5  "  8  "  5  "  5     "            5     " 


228  DEFINITIONS 

Stock  Dividend.  Profits  of  a  business  which  have  been  added 
to  the  capital,  and  distributed  to  stockholders  in  the  form  of  ad- 
ditional shares  of  stock,  instead  of  in  cash. 

Stock  Exchange.  An  association  for  the  purchase  and  sale  of 
stocks  and  other  securities. 

Stockholder.  One  who  owns  shares  of  the  capital  stock  of  a 
corporation  or  stock  company. 

Stockholder's  Ledger.  A  subsidiary  or  memorandum  ledger 
having  the  stock  accounts  of  all  stockholders.  The  total  credits 
of  this  book  equal  the  paid  up  capital  stock  outstanding. 

Stoeks.  The  shares  in  the  capital  of  a  stock  company  or 
corporation. 

Stocks  Account.    Prin.  25  E;  Form  11 D. 

Stock-Taking,  f  Stock-taking  is  an  examination  of  goods  on 
hand  for  the  purpose  of  finding  their  value  and  incorporating  the 
same  into  a  concern's  accounts. 

Storage.    A  charge  made  for  keeping  goods  in  a  warehouse. 

Stub.  The  memorandum  portion  of  a  check,  receipt,  note, 
draft  or  other  paper  which  remains  after  the  paper  is  detached 
and  delivered.    Form  15  D,  15  It,  and  15  S. 

Subscriber.  One  who  signs  his  name  to  an  agreement.  The 
subscriber  to  capital  stock  of  a  corporation  agrees  in  writing  to 
invest  a  given  amount  toward  the  capital  of  the  company. 

Subsidiary  Ledger.    Prin.  80  C. 

Subsidy.  A  grant  or  bonus  by  government  or  a  municipality 
to  a  person  to  assist  him  in  the  establishment  of  an  enterprise 
deemed  advantageous  to  the  public. 

Summary  Account.  tAn  account  into  which  a  number  of  de- 
tail accounts  are  closed  for  the  purpose  of  showing  a  general 
result. 

Sundry.  (Sund.)  More  than  one  or  two.  Various.  Very 
frequently  used  in  bookkeeping  referring  to  a  number  of  accounts 
later  enumerated  as  "Sundry  Accounts ;"  also  referring  to  a  num- 
ber of  items  not  necessary  to  enumerate  as  "Sundry  Expenses." 
Used  as  a  heading  for  miscellaneous  items,  as  a  "Sundry  Column." 

Superintendent.     ( Supt. ) 

Surplus  Account.    Prin.  36. 

Suspended  Ledger.  A  ledger  containing  accounts  separated 
from  the  ordinary  accounts  receivable  ledger,  because  they  are 
considered  doubtful  of  collection.  The  total  of  the  suspended 
ledger  accounts  may  be  written  off  entirely,  and  carried  merely 
as  a  memoranda  record  of  accounts  worth  keeping  in  mind,  but 
not  worth  carrying  at  any  amount. 

Suspense  Account.  An  account  in  which  items,  whose  final 
disposition  is  doubtful,  may  be  charged  oiv  credited  while  awaiting 
final  disposition.    . 


INDEX-COMMENTARY  229 

Syndicate,  f  A  group  of  men,  bankers,  or  any  combination  of 
the  same,  who  combine  in  their  mutual  interests  for  the  purchase 
or  control  of  certain  properties  or  securities.  The  members  of  the 
syndicate  are  generally  bound  by  what  is  called  "syndicate  agree- 
ment ;"  in  other  words,  a  written  instrument  to  carry  out  the  terms 
of  the  agreement,  signed  by  the  parties. 

Tangible  Values.  fThe  direct  and  indirect  cost  of  physical 
property,  as  cost  of  purchase  of  equipment,  labor  and  material 
used  to  install,  with  all  legal,  office,  rent  and  other  expenses  in- 
curred incidental  and  necessary  to  installing. 

Tare.  A  deduction  of  the  weight  of  containers  from  the  gross 
weight. 

Taxable  Income.    Prin.  88  K. 

Taxes.  Contributions  enforced  by  law  upon  individuals  for 
the  support  of  government.  A  tax  is  a  lien  on  real  and  personal 
property.  It  is  designed  to  meet  the  budget  of  expenses  annually 
made  for  the  support  of  the  state,  county,  township,  city,  school 
district,  etc.  In  the  case  of  taxes  levied  on  property,  each  tax- 
payer pays  in  proportion  to  the  assessed  value  of  the  property 
owned  by  him.  Licenses,  poll  taxes,  impost  duties,  etc.,  are  other 
forms  of  taxation. 

Taxes  Account.    Prin.  28  F. 

Telegram.    Form  18  L. 

Teller.  (Tel.)  A  bank  clerk  who  counts  money  paid  to  or 
received  from  customers. 

Tender.  The  offer  of  payment  or  satisfaction  of  a  demand, 
usually  the  offer  of  legal  money,  called  a  legal  tender,  for  the  pay- 
ment of  a  debt. 

Terms  of  Sale.  The  conditions  governing  the  settlement  for 
property  sold.  The  term  "2/10,  n/30"  means  subject  to  two  per 
cent  discount  if  paid  in  10  days,  but  net  or  without  discount  if 
not  paid  before  30  days. 

Tickler.  A  book  arranged  to  show  future  due  paper  or  other 
important  data  in  the  order  of  the  dates  when  attention  should 
be  given  to  them. 

Title.    The  heading  of  an  account.    "Expense"  is  the  title  of 
Form  10  J ;  "Charles  Burton,  Capital,"  of  Form  10  H,  etc. 
Ton  or  Tons.     (T.) 
Tools  Account.    Prin.  24  D. 

Trade  Discount.  A  discount  from  list  prices  or  invoice  prices, 
made  by  wholesalers  to  dealers. 

The  trade  discount  is  often  regarded  as  the  dealer's  trading 
profit,  especially  on  articles  that  are  universally  retailed  at  list 
prices.  Trade  discount  should  be  distinguished  from  "cash  dis- 
count." 

Trade  Mark.  A  device  placed  upon  manufactured  goods  to 
distinguish  them  from  imitations.  Trade  marks  are  copyrighted 
to  insure  their  exclusive  use  by  the  owner. 


230  DEFINITIONS 

Trading  Account.  A  summary  account  in  which  the  gross 
trading  or  manufacturing  profit  of  a  given  accounting  period  is 
shown  by  the  introduction  of  such  subsidiary  accounts  as  Sales, 
Purchases,  Manufactures,  Inventory,  Freight,  Discounts,  Returns, 
Allowances  and  any  other  elements  that  affect  profit  from  sales 
prior  to  the  deduction  of  selling,  general  administrative  and  capi- 
tal expense.     Prin.  55-55  D;  Forms  12  £  and  14  J. 

Trading  Business.  The  business  of  buying  and  selling  com- 
modities.   A  mercantile  business. 

Trading  Statement.     See  "Statement;  Form  12 N,  13  J. 

Transactions.    Prin.  5  and  7. 

Transfer  Binders.    Prin.  80  G. 

Transit.  Checks  or  drafts  are  said  to  be  "in  transit"  when 
they  are  held  by  parties  between  drawer  and  drawee. 

Treasurer.     (Treas.) 

Treasury  Stock.  The  stock  of  a  corporation  which  is  received, 
bought  or  donated  back  after  having  once  been  issued.  Such  stock 
is  carried  in  a  special  account,  entitled  "Treasury  Stock."  Prin. 
39  D. 

Trial  Balance,  f Suggested  definition:  A  trial  balance  is  a 
table  of  the  balances  shown  on  a  ledger  for  the  purpose  of  trying 
their  accuracy.  When  successfully  compiled  it  ceases  to  be  a  trial 
balance  and  becomes  a  statement  of  ledger  balances.  See  Prin. 
80  M ;  Form  10  G,  10  P,  12  J,  12  K,  12  Z. 

Trial  Balance,  locating  errors  in.     Prin.  83  D. 

Trust  Company.  A  financial  institution  that  takes  charge  of 
the  financial  investments  of  persons  or  estates,  and  carries  on  a 
banking  business  in  greater  or  less  degree,  depending  on  state 
laws. 

Trustees.  fTrustees  are  persons  having  charge  of  property 
of  some  other  person,  usually  appointed  by  a  court  and  bound  by 
the  terms  of  the  trust  over  which  they  have  been  appointed. 

Turnover,  f  A  term  used  to  designate  the  cost  of  goods  sold. 
(Illustration  shows  material  and  labor.)     Am.  Enc. 

The  cost  of  goods  sold  during  a  certain  period.  (Illustration 
shows  net  purchases  only.)     Renn. 

Prime  cost  of  the  goods  sold.     Rahill. 

Two-Page  Cash  Book.  Prin.  74  C;  Form  13  B,  13  L,  17  P, 
18  G, 

Ultimo,  (ult.)  In  the  month  just  preceding  the  present 
month. 

Undistributed  Expense.  fExpenses  chargeable  to  operation, 
-but  under  captions  not  determined. 

Undivided  Profits,  t Earnings  or  profits  which  have  not  been 
divided  among  the  partners  in  a  firm  or  the  stockholders  in  a  cor- 
poration. 

Unsubscribed  Stock  Account.  The  account  charged  for  the 
portion  of  the  capital  stock  account  of  a  corporation  which  has 
not  been  apportioned  to  any  subscriber  or  stockholder. 


INDEX-COMMENT  A  R  Y  231 

Up-Keep.  A  term  used  in  real  estate  accounts  to  show  ex- 
penses of  keeping  buildings  in  condition  for  renting;  also  applied 
to  expenses  of  keeping  other  property  in  condition  for  use. 

Utility.  A  thing  that  may  be  sold,  as,  commodities,  serv- 
ices, uses,  or  conditions  of  time  or  place  that  may  be  given  for  a 
price.  The  utility  sold  by  a  grocer  is  in  the  form  of  groceries; 
that  of  a  railroad,  transportation;  that  of  an  electric  light  com- 
pany, light  or  power;  that  of  a  teacher,  instruction;  that  of  a 
lawyer,  advice  or  service. 

Valuation  of  Assets.    Prin.  14. 

Vendors.  tPersons  from  whom  purchases  are  made — usually, 
the  persons  from  whom  a  corporation  takes  over  its  original 
assets. 

Venture  Account.  fVenture  account,  or,  as  it  is  sometimes 
termed,  "adventure  account,"  is  a  title  frequently  applied  to  spe- 
cific shipments  on  consignment  when  made  the  subject  of  sep- 
arate accounts. 

Verifying  the  Posting.    Prin.  80  K. 

Voucher,  f  A  document  which  certifies  or  verifies  the  correct- 
ness of  charges  for  values  paid  out  or  parted  with,  or  of  credits 
for  values  received.    Am.  Enc. 

Vouching  consists  of  obtaining  evidence  (usually  document- 
ary) that  the  transactions  recorded  in  the  books  are  facts.  Mont- 
gomery-Dicksee. 

Any  memorandum  which  will  establish  the  validity  of  the 
transaction  should  be  accepted  as  satisfactory.    Renn. 

Prin.  61. 

Vouchers  Payable.    Prin.  31 D. 

Voucher  System.  fThe  voucher  system  is  the  treatment  of 
creditors'  accounts  in  such  a  way  as  to  obviate  the  necessity  of 
keeping  the  individual  accounts,  thus  greatly  curtailing  the  labor 
of  posting  and  yet  at  the  same  time  greatly  facilitating  the  anal- 
ysis of  expenditures  under  their  classified  headings.  See  Prin. 
76  D. 

Wage  Hour,  f  A  basis  for  the  distribution  of  labor.  As  a  unit 
it  constitutes  the  wage  of  one  operative  one  hour. 

Wages.  f(l)  Compensation  allowed  for  manual  labor.  (2) 
That  share  of  production  which  is  assigned  to  labor. 

Waiting  Assets.    Prin.  26. 

Watered  Stock,  f Stock  which  appears  on  the  books  as  fully 
paid  up,  but  for  which  only  partial  or  no  value  has  been  received, 
and  which,  therefore,  represents  some  inflated  or  fictitious  value. 
Am.  Enc. 

Capital  stock  issued  for  which  no  value  has  been  received. 
Tipson. 

An  increase  of  the  capital  stock  of  a  corporation  without  a 
corresponding  increase  in  the  assets  of  the  company.  Stock  ac- 
quired for  less  than  an  equivalent  exchange  of  value.    Rahill. 

Stock  issued  above  the  authorized  capital.    Keister. 


232  '       DEFINITIONS 

If  all  the  original  capital  stock  has  been  issued  and  the  com 
pany  should  issue  stock  to  .pay  dividends,  it  would  be  "watering." 
Keister. 

Way  Bill.  A  form  accompanying  freight  shipments  to  show 
the  routing  and  disposition.     Form  24  A. 

Wholesale.     Sale  in  quantity  suitable  for  division  by  retailers. 

Working  Account,  f  An  account  sometimes  found  in  financial 
reports  of  cotton  mills  in  which  the  manufacturing,  trading  and 
profit  and  loss  accounts  are  combined. 

Working  Capital,  f That  portion  of  capital  used  in  the  active 
operations  of  a  business.  It  may  consist  of  (1)  capital  stock  sub- 
scribed and  paid;  (2)  capital  stock  sold  to  stockholders  to  raise 
cash;  (3)  dividends  or  surplus  undistributed;  (4)  part  of  pur- 
chase money  of  business  allowed  to  remain  unpaid;  (5)  loans 
from  bank  or  otherwise;  (6)  proceeds  of  accommodation  notes; 
(7)  proceeds  of  sale  of  bonds;  (8)  assessment  on  stockholders. 
Am.  Enc. 

All  assets  available  as  cash  for  the  carrying  on  of  a  business. 
Tipson. 

Works  Ledger.  fThe  subsidiary  book  in  which  is  recorded  in 
detail  the  cost  of  producing  or  manufacturing  goods  for  sale. 

Yards,     (yd.) 


$ 


54!!M6 


4juc  ^U- 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


